Proposed rules give Retirees more options

The Departments of Treasury and Labor have unveiled two executive actions to expand the transparency of 401(k) fees and broaden the availability of retirement plan payout options.

The purpose of these actions is to encourage the use of annuities to provide lifetime income. The annuity rules are designed to help retirees who are worried about outliving their retirement savings.

Historically, the most comprehensive solution to the challenge of retirement security has been to replace the paycheck retirees received when they were working with a guaranteed and predictable stream of lifetime income, such as a defined benefit pension or life annuity.

Over time, the use of annuities and other lifetime income in retirement plans has been diminishing as the number of traditional pension plans has declined. Today's more common defined contribution plans, such as 401(k) plans, typically offer a lump-sum payout option.

The new package of proposed regulations is designed to make it easier for retirement plans to offer workers a wider range of choices for receiving their benefits. The proposals include rules to:

  • Make it easier for retirement plans to offer combination options that avoid an all-or-nothing choice. For example, plans could provide the option to take a portion of your plan benefit as a stream of regular monthly income payable for life, while taking the remainder in a single lump-sum cash payment.
  • Remove a key obstacle to longevity annuities. A proposed regulation would give special relief from the minimum distribution requirement. As long as the annuity costs no more than 25 percent of the account balance or up to $100,000, whichever is less, and will begin payouts by age 85, it would not be subject to required minimum distributions before the annuity begins.
  • Clarify rules for plan rollovers to purchase annuities. Employees receiving lump-sum cash payout from their employer's 401(k) plan can transfer some or all of the amount to the employer's defined benefit pension plan - if the employer has one and is willing to allow the transfer. 
  • Resolve uncertainty about how the 401(k) plan spousal protection rule applies when employees choose deferred annuities, including longevity annuities, from their plans. This ruling describes various arrangements permitting employees who are not yet ready to retire to invest their account balances in lifetime income benefits - either on a one-time basis or incrementally over a period of years - under deferred annuity contracts that will begin payments at retirement or later. The guidance identifies plan and annuity terms that will automatically protect spousal rights without requiring spousal consent before the annuity begins.

Click here to read more in the government's fact sheet.

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