While the Obama administration with one hand is pushing employers to include annuities as options in 401(k) plans, with the other hand it wants to allow investment advisers to ignore those same annuities when offering individual advice to 401(k) plan participants.
That at least is the view of the insurance industry, whose member companies are pushing an increasingly varied assortment of deferred retirement annuities that offer purchasers guaranteed monthly payments often starting at age 65.
Conflicting messages
The conflicting Obama message came in the form of a proposed rule in early March that made some changes to a final rule the Bush administration issued in its waning days. The Department of Labor declined to change an "anti-annuity" provision in the Bush final rule, implemented in the Pension Protection Act of 2006.
That law widened opportunities for investment advisers to give advice to individual 401(k) plan participants even if that advice led to higher fees for the adviser.
One of the new opportunities is greater leeway for advisers to recommend higher fee products if that recommendation came by way of an independent computer model. The Bush final rule said those computer models did not have to include annuities even if annuities were among the options in the individual's 401(k) plan.
There are a number of other aspects of the "computer model" requirement that have also proved controversial, such as its ruling out of historical performance as a criterion to be cranked into the asset allocation model.
The Obama administration declined to change that "anti-annuity" provision in the proposed rule it issued in early March. The life insurance industry has complained bitterly, arguing the administration is trampling on its own commitment to encourage companies to make annuities more widely available to employees.
That commitment was reflected in a February request for information from the Labor and Treasury Departments asking employers and pension plan vendors what the government could do to increase attractiveness of annuities.
The administration has been concerned about the perilous situation of 401(k)s in the wake of the recession, the forced early retirement of many workers and the questions surrounding the long-term viability of the Social Security system.
The February 2010 Annual Report of the White House Task Force on the Middle Class discussed, but did not recommend, "guaranteed retirement accounts."
Not only does the government's refusal to ditch the Bush anti-annuity position appear contradictory, it also makes no sense in the eyes of the Committee of Annuity Insurers, an industry group represented by Jason K. Bortz, an attorney at Davis & Harman LLP.
"There is no policy rationale for the exclusion of annuities. To the contrary, encouraging participants to elect to receive a portion of their retirement savings in the form of a lifetime income option, such as an annuity, is an important policy goal, as recently articulated by the departments' request for information regarding lifetime-income options published on February 2, 2010," says Bortz.
"It is clear that the regulations should reflect a strong bias toward including all options and, in the absence of a compelling public policy rationale to the contrary, we believe that annuities should be taken into account," she adds.
U-turn is possible
The Bush final rule did not exclude only annuities from the computer model requirement; it also said target-date funds, brokerage windows and company stock funds also could be ignored.
But with regard to annuities, the Bush rule said: "A computer model will not fail merely because it does not make recommendations with respect to an annuity option with respect to which a participant or beneficiary may allocate assets toward the purchase of a stream of retirement income payments guaranteed by an insurance company."
The Bush administration never fully explained why annuities could be excluded. The language of the PPA computer-model provision passed by Congress does not dictate their exclusion. One investment industry lobbyist explains that the Bush administration excluded them because annuities have a different risk/reward profile than mutual funds, which are the backbone of 401(k) plans.
The Bush administration may have also been sensitive to pressure from the investment industry. The Securities Industry and Financial Markets Association, which represents brokerage firms, opposes inclusion of annuities in computer models.
Liz Varley, managing director, government affairs, for the SIFMA, says: "We do believe it would be difficult to include certain annuity options in certain computermodels. In the computer model context, flexibility is very important ifwe expect computer models to beutilized by participants. Even strong proponents of including annuities in computer models acknowledged that difficulties exist today."
Sherrie Grabot, president and CEO of GuidedChoice, an independent advisory firm, says her company's computer models do include annuities. "I would go a step further though, and say we include some of the new lifetime guarantee products that are not annuities, as should all models," she adds.
A DOL spokeswoman did not respond to questions about when an Obama final rule on the PPA exemption expansion would be published, nor about why the administration is keeping the Bush "anti-annuity" provision.
DOL could do a U-turn on that when it publishes the final rule. The merits of doing so would seem to be significant, both for employee benefit and retirement reasons.
Stephen Barlas is a freelance writer based in Virginia.
