I mentioned in a posting last week that we will take some time on this blog to work through a number of the legal and technical issues related to annuitizing out of 401(k) plans. This, in effect, allows the 401(k) plan to offer the best features of the Defined Benefit and Defined Contribution plans without the huge burdens that typically are associated with DB programs.
You would think from the number of articles written in the past several years condemning the use of annuities in qualified plans that any plan sponsor would be off their rocker to even consider making this benefit available under their plan. So I think It is well worth noting the value of these types of insurance products before we get lost in the “technical weeds” of annuitization. Annuities do something that no other financial service product in the world (other than life insurance) can do: they pool our common interests for the general benefit of all.
But most folks see the “price”of this pooling as being a bit too “salty” for their tastes-they stay away from annuities because those contracts provide a benefit which is generally inflexible, inaccessible and invisible. Or, as my brother has put it, its just a bet against the insurance company which the insurance company will win.
That world is now changing. As an example, Transamerica and Lincoln Financial have just finished round one in their litigation over the enforceability of a patent of an annuity design which both pools interests and gives policyholders control. Each of the major insurance carriers have been developing similar products as well, trying to address policyholder concerns over balancing liquidity with security.
So, finally, it appears that there will be annuity products available in the marketplace which serves policyholders well. The technical challlenge is to successfully fit these new products into defined contribution plans where there is a great need for a “defined benefit” type of program. I would hope then that the value we each receive from the pooling of our common interest would get the favor it deserves.