U.S. officials deal with “longevity risk”

Treasury official announce new annuity option for defined contribution plans.

U.S. officials deal with “longevity risk”
Yesterday WP ran a summary of an idea floated by controversial Nobel Prize-winning economist Robert Merton, who suggested it was important defined contribution pension plans have an annuity option.

Someone must have been paying attention.  

According to a trade report on Tuesday the Treasury Department has just finalized rules governing so-called longevity annuities, a deferred income vehicle for defined contribution plans, so-called 401(k)s in the U.S. the new option will begin paying out when the retiree reaches an advanced age of 80 or 85 and will continue through the individual's life. The new option is described as a way to help those who might make bad decisions and outlive a lump-sum payment from the plan.  

The announcement came from a deputy assistant secretary at Treasury at a policy conference organized by the Insured Retirement Institute. According to the report the announcement is a part of a plan to confront the looming “retirement challenge” brewing. Various factors—insufficient savings rates, an aging population, rising life expectancies—have made it difficult to plan for retirements that are lasting 30 years or longer.

WP also ran stories about both "outliving funds" and new longevity derivatives as well as the issues around lengthening retirements here. These are trendy ideas today. ‘People are increasingly confronting the longevity risk problem," said the Treasury official announcing the new option.  "Americans are increasingly recognizing that it's hard for an individual who doesn't know his or her future lifespan to deal with and manage the risk of running out of assets while they're in retirement."

Apparently, the Treasury Department is hoping the annuity will mean fewer Americans cash out their 401(k) or IRA plan as a lump sum once they retire. As it is, participants in 401(k) plans “overwhelmingly” opt for a lump sum payout. “Smitten at the prospect of instantly receiving more money than they've ever seen in their lives” said the official, they fall for a "wealth illusion." The new option is designed “to overcome some of the behavioral inhibitions…The longevity annuity has the advantage of overcoming the all-or-nothing character of the choice architecture, if you will, confronting the individual when they're making the decision, especially in a 401(k) plan, how to take your benefits.”