by John Darer CLU ChFC CSSC RSP
In this month's Advisor Today John Rafferty, VP Marketing at American General opines that understanding the "lump sum-to-income" conversion math is not second nature to most people and that a better retirement can be created by helping people adopt an "income"mindset.
As Rafferty points out the Senate thinks this is so much of an issue that a bill was introduced December 3, 2009 to rectify the situation (at least for those covered by ERISA Retirement plans).
The following is a summary of he proposed act written by the Congressional Research Service, a well respected non partisan arm of the Library of Congress:
S2852 "Lifetime Income Disclosure Act - Amends the Employee Retirement Income Security Act of 1974 (ERISA) to require the quarterly pension benefit statement furnished to a participant or beneficiary with the right to direct the investment of assets in his or her account under an individual account plan to include a lifetime income disclosure at least once every calendar year. Requires such a lifetime income disclosure to set forth the annuity equivalent of the participant's or beneficiary's total benefits accrued. Defines an annuity equivalent of the total benefits accrued as the monthly annuity payment the participant or beneficiary would receive at the plan's normal retirement age if those total accrued benefits were used on the date of the lifetime income disclosure to purchase certain qualified joint and survivor life annuities whose annuity payments would commence at the plan's normal retirement age. Directs the Secretary of Labor to: (1) issue a model lifetime income disclosure, written in a manner which can be understood by the average plan participant; and (2) prescribe assumptions that plan administrators may use in converting total accrued benefits into annuity equivalents. Declares that no plan fiduciary, plan sponsor, or other person shall have any liability under ERISA solely by reason of the provision of annuity equivalents derived in accordance with such assumptions and related rules and including explanations contained in the model lifetime income disclosure". (Underlines and bold added by this author for emphasis)
Why stop at retirement planning?
Life insurance proceeds? Most life insurance companies give a beneficiary a number of settlement options for the proceeds, which include lifetime income options. Many also include a retained asset account to help beneficiaries pay immediate bills to buy time and provide a decision free zone while they work through the intricate emotional issues that follow a sudden money event
Lottery proceeds? We've all read the pathetic stories of poeple who have won bazillions of dollars or pounds who have managed to squander this money in a very short period of time. The problem is that there are too few options (basically income or cash) and nothing in between. Intead of giving the tabloids the ability to exploit the worst in human frailty. there should be mandatory disclosures and an option or options that offer a percentage into an annuity instead of all or nothing.
Personal Injury settlements? Divorce settlements? Workers Compensation settlements? Why not make it mandatory that a structured settlement is offered as a choice? Most personal injury attorney have anectdotes from their own clients and have heard or read of others. While many attorneys have a good sense some dismiss a structured settlement without giving their client the opportunity to make the decision. From time to time I have received calls from people "after the fact" and have to tell them that it is too late to receive an income tax free structured settlement.
To be continued...