Well, technically, we didn’t write this idea on the beer napkin, but the thought occurred to us to do so as David John and I were sitting in a restaurant at Union Station quaffing one or two. The beer napkin was too wet to write on, but here’s the idea as best I remember it. Lets call it the Beer Napkin Annuity.
As many folks work to answer the IRS’/DOL’s RFI, one thing is clearly coming out: there is a LOT of resistance to mandatory annuitzation of 401(k) account balances. I can’t say that I really disagree with that resistance. Heck, I saved that money, didn’t I? But what should we do to address the fact that account balances run out? We continue to hear of "Pension Envy" against those fortunate few who are eligible for those steady, comforting monthly DB benefits.
Traditionally, the tax system was designed so that an employee can have the full, intended retirement plan benefit by an employer maintaining BOTH a DB and a DC plan. The benefit from each plan is limited (generally a $195,000 per year payment from the DB for 2010, and a $49,000 plus a 5k "old guy catch-up" for DC plans. In reality the limits get a whole lot more complicated in application, particularly when combined with other plans). These two limits were one time coordinated, so you couldn’t get the max out of each plan. But this coordination was repealed in 1996. This means that employees can max out in both plans (up to the employer’s deduction limit) if the employer chose to offer them. And many did. Now, for a variety of reasons (many upon which I have blogged), employers have been dumping the DB; trying to goose the DC plans; or trying to turn their DB plans in DC plans via the inartful effort of the Cash Balance Plan.
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