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Treasury, IRS OK Annuities In 401(k) Target Date Funds
FYI: Treasury Department and IRS approval on Friday of the use of annuities in target date funds in 401(k) plans, including as a default investment, will make lifetime-income features more popular and help ensure that droves of baby boomers don't outlive their nest egg, industry officials and experts say. Regards, Ted http://www.investmentnews.com/article/20141024/FREE/141029947?template=printart
Many 401(k)s offer "brokerage windows" that allow employees to purchase individual bonds. The provider (issuer/guarantor) of these bonds can default.
Are you just asking whether the government is responsible for all losses (such defaults on bonds) in 401(k) plans, or do you have something more specific in mind?
While the article talks about several different types of offerings where the Treasury Dept has relaxed regulations on what a 401(k) can contain, unfortunately it offers a citation to only one of those changes. So it is difficult to figure out exactly what else is now being permitted. Or frankly, even exactly how the annuities within target date funds would work. (I found I had more questions after reading the cited IRS Notice 2014-66.)
A keyword here is "permitted." Treasury is adding no requirements, no mandates. Are you suggesting in your question that employees' 401(k)s choices should be further restricted by the government (e.g. closing brokerage windows)?
There's a case to be made for that. As you point out, the more freedom employees have with their retirement investments, the greater the possibility of total loss (as well as the possibility of greater gain).
"In his Nobel Prize acceptance speech given in 1985, Franco Modigliani drew attention to the "annuitization puzzle": that annuity contracts, other than pensions through group insurance, are extremely rare. Rational choice theory predicts that households will find annuities attractive at the onset of retirement because they address the risk of outliving one's income, but in fact, relatively few of those facing retirement choose to annuitize a substantial portion of their wealth." (From the abstract)
"The theoretical prediction that many people will want to annuitize a substantial portion of their wealth stands in sharp contrast to what we observe. Only a tiny share of those who reach retirement age with money in a personal retirement account or other financial assets will choose to annuitize a substantial share of that wealth. Part of the reason is that only 21 percent of defined contribution plans even offer annuities as an option (PSCA, 2009), and virtually no 401(k) plans do." (From the text.)
Comments
Have a good week , Derf
When I see things like this I am left wishing for schemes to create new prosperity instead of one more skimming idea.
Are you just asking whether the government is responsible for all losses (such defaults on bonds) in 401(k) plans, or do you have something more specific in mind?
While the article talks about several different types of offerings where the Treasury Dept has relaxed regulations on what a 401(k) can contain, unfortunately it offers a citation to only one of those changes. So it is difficult to figure out exactly what else is now being permitted. Or frankly, even exactly how the annuities within target date funds would work. (I found I had more questions after reading the cited IRS Notice 2014-66.)
A keyword here is "permitted." Treasury is adding no requirements, no mandates. Are you suggesting in your question that employees' 401(k)s choices should be further restricted by the government (e.g. closing brokerage windows)?
There's a case to be made for that. As you point out, the more freedom employees have with their retirement investments, the greater the possibility of total loss (as well as the possibility of greater gain).
https://www.aeaweb.org/articles.php?doi=10.1257/jep.25.4.143 (Journal of Economic Perspectives)
"In his Nobel Prize acceptance speech given in 1985, Franco Modigliani drew attention to the "annuitization puzzle": that annuity contracts, other than pensions through group insurance, are extremely rare. Rational choice theory predicts that households will find annuities attractive at the onset of retirement because they address the risk of outliving one's income, but in fact, relatively few of those facing retirement choose to annuitize a substantial portion of their wealth." (From the abstract)
"The theoretical prediction that many people will want to annuitize a substantial portion of their wealth stands in sharp contrast to what we observe. Only a tiny share of those who reach retirement age with money in a personal retirement account or other financial assets will choose to annuitize a substantial share of that wealth. Part of the reason is that only 21 percent of defined contribution plans even offer annuities as an option (PSCA, 2009), and virtually no 401(k) plans do." (From the text.)