When the insurance industry began seriously developing the “living benefits” under annuity products for the retail marketplace a few years back, I dubbed them as “not your grandpa’s annuity.” This is because they were attempting to address the concerns that the market had about traditional annuities, which are seen as irrevocable, inaccessible, invisible and inflexible. ( I have blogged on this a few times in the past. Click on the “401(k) Annuitization” link at the right sidebar to see the posts).
It is encouraging to see the discussion now seriously moving to the provision of these types of products from retirement plans.
Much of this new discussion is focused only something called “guaranteed minimum withdrawal benefits,” or “GMWBs.” Under these sorts of arrangements, a systemic monthly withdrawal is made from the participant’s account under the annuity, which will be guaranteed for the participant’s lifetime-even when the account balance runs out. This is a popular program in the non-plan marketplace, and (at the appropriate price) can be well suited as a distribution option under a 401(k) plan.
GMWBs are not the entire story, however, as there is a whole range of “living benefits” beyond GMWBs which may be appropriate for distribution under a 401(k) plan. This list includes things like:
- variable annuitization, which provides lifetime income while giving the policyholder some level of equity or “equity-like” participation;
- guaranteed minimum account value programs (GMAB), which lock in investment gains over a period of time;
- guaranteed minimum income benefits (GMIB), which insure the purchase of a minimum income stream beginning at a certain time, regardless of underlying equity performance; and
- a guaranteed lifetime withdrawal benefit (GLWB), which insures the ability to withdrawal benefits at a minimum level for a lifetime.
The legal issues in providing these benefits are all very similar, and are addressed in my newly updated article for BNA Pension & Benefits Daily, “Annuitizing From § 401(a) Defined Contribution Plans: A Technical Overview.” For those with far too much time on their hands, and wanting to read a more extensive discussion on the topic, I am reposting the Tax Management Memorandum on “Income Guarantees in Defined Contribution Plans.”