It is back to the future, in an odd sort of way. There is growing trade press coverage on the interests of 401(k) plans and plan participants on turning a portion of participants’ account balances into a "defined benefit-like" guaranteed income stream. Follow, for example, this link to Plan Advisor.com.
There are really two ways transform that 401(k) account balance into annuity payments. The first is to annuitize from within the 401(k) plan itself. This means that you need to
- take care that you don’t turn the 401(k) plan into a defined benefit plan;
- deal with the pesky issue of handling an "outside asset" not typically held by the plan’s custodian; and
- figure out how to make those guarantees portable.
The second way is to offer a distribution option from the plan of a "plan distributed annuity." This opens up a whole world of guarantees that can be provided using a 401(k) account balance, as well as being a potential answer to the portability issue mentioned above.
We will post over the next several weeks a number of blogs which will discuss some of the legal and technical issues related to these sorts of programs. For starters, if you’re interested, take a look at the articles we published with BNA and CCH last year which discusses some of the legal issues involved:
- BNA paper, "Annuitizing From 401(a) Defined Contribution Plans"
- CCH paper, "Distributinfg Annuities Fom Defined Contribution Plans"
Please note that the reference in the BNA paper to my former law firm is now incorrect!
We look forward to carrying on the conversation.