Why the U.S. Government Is Pushing Annuities

As more individuals enter retirement relying solely on their 401(k) plans, government officials are encouraging them to look at other options, including annuities. For many generations, company pension plans were the retirement standard. Today, they have almost faded into obscurity, having been replaced by the 401(k) plan.

While 401(k) plans have many advantages, they’re self-managed. That means some individuals could mismanage their money and outlive their savings. To reduce that risk, the Obama administration has begun encouraging retirees to invest in products like annuities that produce a lifetime income stream.

An annuity is a contract between an individual and an insurance company. The individual gives the insurance company a sum of money, and the individual gets a stream of income for a specified period of time, often life.
Annuities don’t have to replace other retirement savings. They can supplement them. For example, some individuals use annuity income to close the gap between their other retirement savings, including Social Security and 401(k) plans, and their income needs.

Many annuity options are available, such as ones that guarantee payments will continue for at least 20 years and ones that are inflation-indexed.

In 2010, the U.S. Department of Labor and U.S. Department of the Treasury asked the public to comment on ways the government could steer Americans into annuities.  One option was requiring part of an employee’s 401(k) plan contributions to be placed in an annuity unless the employee opted out.

Individuals who submitted comments did not like the idea of annuities being mandatory in any way, but the Labor and Treasury departments began holding hearings on the topic in September 2010.