Washington viewing annuities as part of a lifetime income solution

President Obama recently called for a change in rules to allow the use of annuities as investment options within 401(k) plans.

Annuities are insurance agreements that provide a guaranteed income stream in retirement.

A fact sheet released by the Administration’s Middle Class Task Force noted that 401(k) regulations need to be updated to improve transparency and reliability. The Administration is “promoting the availability of annuities and other forms of guaranteed life income” to reduce the risk that retirees will outlive their savings.

All workers, no matter their level of financial sophistication, should have access to well-diversified low-cost investment options. They should also have an easy way to put a portion of their savings in a safe, inflation-protected investment choice. …To address this, some have suggested the creation of Guaranteed Retirement Accounts (GRAs), which would give workers a simple way to invest a portion of their retirement savings in an account that was free of inflation and market risk, and in some versions under discussion, would guarantee a specified real return above the rate of inflation. These accounts would allow workers to be sure that the funds invested in them will grow steadily without the risk of a market collapse. (Annual Report of the White House Task Force on the Middle Class, February 2010.)

With steep losses suffered in the market downturn, a growing number of investors have been seeking some form of guarantee in their retirement investments.

Since last fall, Putnam’s CEO Bob Reynolds has been calling for increased collaboration between the public and private sectors, saying that 2010 should be the year to work on strengthening the nation’s retirement system. Reynolds has repeatedly emphasized the need for lifetime income for investors and has encouraged increased collaboration between asset managers and insurers.

Putnam has already introduced innovation to its RetirementReady® lifecycle funds by making absolute return strategies an integral part.

But guaranteed income products should be part of the solution as well, Reynolds says. The optimum solution will require a combination of elements working in concert.

A best-case scenario would create a lifelong product allocation glide path that links higher-risk/higher-return investment assets (like traditional, relative-return mutual funds) with less-volatile absolute return strategies. These investments should ride on a firm base of assured or guaranteed income products, such as annuities or non-annuity income solutions.

The over-arching goal is to help investors replace a substantial share of their preretirement income for life.

For its part, the Administration and other federal agencies have begun researching ways to structure rules that will facilitate the use of annuities in retirement plans. This could pave the way for Reynolds’s vision to become the reality for all working Americans.

Consider these risks before investing: Asset allocation decisions may not always be correct and may adversely affect fund performance. The use of leverage through derivatives may magnify this risk. Leverage and derivatives carry other risks that may result in losses, including the effects of unexpected market shifts and/or the potential illiquidity of certain derivatives. International investments carry risks of volatile currencies, economies, and governments, and emerging-market securities can be illiquid. Bonds are affected by changes in interest rates, credit conditions, and inflation. As interest rates rise, prices of bonds fall. Long-term bonds are more sensitive to interest-rate risk than short-term bonds, while lower-rated bonds may offer higher yields in return for more risk. Unlike bonds, bond funds have ongoing fees and expenses. Stocks of small and/or midsize companies increase the risk of greater price fluctuations. REITs involve the risks of real estate investing, including declining property values. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. Additional risks are listed in the funds’ prospectus.
Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other governmental agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in this fund.

Each RetirementReady Fund has a different target date indicating when the fund’s investors expect to retire and begin withdrawing assets from their account. The dates range from 2010 to 2050 in five-year intervals, with the exception of the Maturity Fund, which is designed for investors at or near retirement. The funds are generally weighted more heavily toward more aggressive, higher-risk investments when the target date of the fund is far off, and more conservative, lower-risk investments when the target date of the fund is near. This means that both the risk of your investment and your potential return are reduced as the target date of the particular fund approaches, although there can be no assurance that any one fund will have less risk or more reward than any other fund. The principal value of the funds is not guaranteed at any time, including the target date.

Variable annuities are long-term investment vehicles intended for retirement planning. Annuities have insurance related charges and tax considerations and are offered by contract only. All guarantees are based on the claims-paying ability of the issuing company.