NEW YORK (CNNMoney) -- The Obama administration proposed new rules Thursday to help retirees make their savings last throughout their lifetime -- by investing in annuities.
By taking out some of the regulatory roadblocks that have made annuities less attractive for employees and employers to add them to their retirement plans, the government is hoping to give more Americans ways to keep income flowing later in life.
Annuities are investments that pay out fixed amounts of income at a future date. Depending on the type of annuity, you can receive payments on a monthly, annual or lump-sum basis.
The retirement rescue plan, which was announced in a joint press release by the Internal Revenue Service and the Treasury Department, comes at a time when an increasing number of Americans are being forced to wait longer to retire and find themselves without enough money to live comfortably once they do reach their golden years.
The proposals are an extension of other measures that President Obama has put in place to help Americans save for retirement, including automatic enrollment in 401(k)s.
Partial annuities: The first proposal would offer employees more options when it comes to how they cash out their pension plans at retirement. Upon retirement, employees typically face the option of either cashing out their pension or getting a lifetime income stream through an annuity. For many retirees, it's often much more appealing to just take the lump sum.
Yet, this option often leads them to come up short on funds later on in retirement. To prevent this from happening, the government is encouraging retirees to take a combination of both approaches, or a partial annuity. The pension holder gets both a lump sum of money immediately upon retirement, but also receives income payments throughout retirement.
Many accounts don't offer this option, or if they do, employees are largely unaware it exists. In order to make this option clearer and more attractive, the government said it wants to simplify the way partial annuities are calculated, so that it's easier for employers to realize the potential benefit of this option and advertise it to employees.
Longevity annuities: The government also wants to make it easier for employees to invest in longevity annuities through their 401(k)s and IRAs. To do so, it wants to provide relief from minimum distribution requirements that could cause them to run out of money in retirement.
Longevity annuities typically don't start making income payments until the investor is well into retirement, say 85 years old. When offered in 401(k)s and IRAs, these annuities are funded using part of the employee's retirement savings.
Under the minimum distribution requirement, individuals must begin taking payouts from their retirement plans soon after age 70. That minimum distribution amount is typically calculated by dividing the employee's entire account balance by their life expectancy.
Even though the retiree may not have access to the funds in the annuity, it's still used in the calculation that determines how much they must withdraw, putting them at risk of running out of money before they can access the funds from the annuity. As a result, many employees don't invest in longevity annuities.
In order to encourage more employees to choose this option, the government is proposing to ease the minimum distribution requirements for longevity annuities.
For annuities that cost up to 25% of the account balance or $100,000 (whichever is less) and that are scheduled to begin distributing income by age 85, the value of the annuity will not be included in the minimum distribution requirement calculation until the annuity begins.
401(k) fee disclosure: In addition to the new annuity proposals, the government also finalized a set of rules aimed at boosting transparency in the retirement market and allowing employers to shop around for the best plan.
The new rules require 401(k) providers to disclose to employers the fees that they pay for retirement plan administration and money management. The original deadline for compliance by the plan sponsors has been pushed back by three months, to July 1, the government said Thursday.
A separate proposal that would require 401(k) providers to publish a concise and easy-to-understand "roadmap" of their fees for employers was delayed prior to Thursday's announcement, but will be introduced in the "near future", according to the agencies.
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