Annuities and Other Forms of Guaranteed Income are Priorities for the Obama Administration

Much has been written over the past couple of weeks about the Obama Administration's support of annuities.

The New York Times ran a story about the "unloved annuity getting a hug from Obama."

Bloomberg featured an article in its personal finance section describing the potential, the pitfalls and the overall industry enthusiasm surrounding in-plan annuities.

The federal government has posted a formal request for advice on the use of annuities and other lifetime income products within employer sponsored retirement plans such as 401ks.

The Department of Labor has formally acknowledged that improving the existing defined contribution savings system will involve the DOL undertaking specific regulatory efforts to "reduce barriers to annuitization of 401k plan assets."

Why all the fuss?

It likely involves a concern that the current retirement system in the United States--which is largely and increasingly premised on defined contribution pension plans such as 401ks--will not meet the needs of millions of retirees.

One problem involves the fact that Americans generally are not saving enough for retirement.  Annuities will do nothing to address this issue.

Another risk factor involves the combination of lump sum distributions and longevity risk.  When approaching retirement, many Americans will receive funds from their pension plan in the form of a lump sum or the total amount of their accumulated savings.  

Individual--rather than pension plan sponsors and administrators--have the responsibility for making this pot of money last a lifetime. 

This is where annuities come into play.  People are living longer and they must often finance this longevity with their own funds which they have responsibility for managing.

The Obama Administration simply wants to create incentives for Americans to build a base of lifetime income with their private savings.  There are natural behavioral hurdles to the use of annuities that the Administration is attempting to address by "nudging" people in the right direction.