Automatic Annuitization Proposed

Written by Nick Curabba

Defined contribution plan participants would automatically get temporary annuity-like benefit distributions under a new proposal floated today by several authors affiliated with the Retirement Security Project. The proposal, contained in a paper by William Gale, Mark Iwry, David John, and Lina Walker, would permit (not require) plan sponsors to provide two-year "test drive" annuity-like payments from a portion of their 401(k) account balance upon retirement.  After the initial two-year period, the participant could elect to continue the income stream for life, or elect to have his or her account balance distributed in any other way permitted by the plan. 

According to Iwry and Walker, who described their proposal at a Brookings Institution conference yesterday, the automatic, temporary nature of the proposal is intended to get participants used to and educated about the virtues of annuitization.  After two years of receiving a steady stream of retirement income, the authors hope more will choose to continue to annuitize for life.  Much like prior RSP proposals to encourage automatic enrollment 401(k) plans, this proposal would also automatically continue the annuity income payments for any participant who does not affirmatively elect to opt out after the two-year period.

Given the success Iwry and company had with the automatic 401(k) idea, we expect at the very least for this proposal to be seriously considered by Congress next year, and could very likely see some movement toward enactment.