The federal government is trying to ease the way for workers to buy annuities with their retirement savings. The goal: to create a source of income that people can't outlive.  Insurers, already seeing demand for such products, are rolling out new annuities, which provide fixed lifetime payments in return for a lump sum and have been widely available outside of retirement plans for years.  President Obama: looking for ways to create a lifetime income source.  Obama administration officials have been wrestling with the challenge of funding retirement across lengthening lifetimes and amid dwindling traditional "defined-benefit" pension plans. Those, of course, largely have been replaced with 401(k) and other "defined-contribution" plans, in which workers shoulder all of the risk involved in making their savings last.  Annuities have their own set of drawbacks, including steep fees for income guarantees, fixed payments that could lose purchasing power amid future inflation and complicated mechanics that can take hundreds of pages to explain. But they have a trump card over most other retirement investments: You can't outlive their guaranteed lifetime payments.  The Treasury Department on Thursday rolled out a proposal making it possible to buy "longevity" annuities with a portion of savings in employer-sponsored retirement plans, including 401(k)s. A separate proposal pushes partial annuity options for traditional pension plans. And a ruling issued on Thursday clarifies how protections for workers and their spouses apply to annuities in retirement plans.  Here's what the new proposals address.  Longevity annuities. These can provide a cost-effective way for people early in retirement, typically 65 to 70 years old, to help address the risk of outliving their assets by buying a predictable income stream with a portion of their retirement savings that would start at age 80 or 85. Once a retiree knows how long the remaining nest egg has to last, managing those savings is much less stressful.  The current barrier: Workers have to start taking required minimum distributions from retirement accounts at age 70½, including the value of an annuity within the plan. Under the Treasury proposal, an annuity that costs no more than 25% of the account balance, up to $100,000, and that begins by age 85, would be disregarded when calculating required withdrawals.  Having backup income late in life could be a big help. A 65-year-old woman has a 50-50 chance of living past age 86, and the same-aged man has an even chance of living past age 84, according to the Social Security Administration's 2011 annual report.  While only 17% of 65 to 69 year olds get most of their income (90% or more) from Social Security, 33% of those who are 80 and over do so.  Partial annuities. At the same time life expectancies have been increasing, the use of lifetime-income tools in pension plans has been dwindling, according to a Treasury report. Defined-benefit plans are being phased out, and the ones left standing are increasingly offering lump-sum payouts.  Rather than leaving workers in defined-benefit pension plans with a choice between cash or a traditional pension, the Treasury proposal would make it simpler for such plans to offer both by streamlining the calculation of a partial annuity. That way a retiree could convert part of his account to fixed payments and keep the rest invested.  Spousal benefits. A revenue ruling also resolved uncertainty about how 401(k) rules that protect spouses' benefits apply when an employee chooses a deferred annuity.  Under the rules, a worker who elected a single-life annuity—one with a benefit that would end when the worker dies, rather than continuing for the surviving spouse—has to get his or her spouse's written consent. The ruling spells out terms that don't require spousal consent until the annuity begins, at which point the insurer issuing the annuity, rather than the employer plan, would handle it, according to a Treasury fact sheet.  New products. Even before the government's recent round of proposals and rulings, insurers were starting to experiment with annuities in 401(k)s. In January, ING introduced a "lifetime-income protection" program that gradually would move retirement assets from target-date funds into variable annuities with minimum guaranteed withdrawal benefits.  The annuities carry a 1% annual fee, and fund fees can range from 1.3% to 1.6%, with total fees maxing out at 2%. One-third of a worker's savings would be moved into the annuity 17 years before retirement, with the entire account invested in the annuity five years from retirement, says Richard Mason, president of corporate markets at ING's U.S. retirement division.  Firms including Aegon's Diversified Investment Advisors, AllianceBernstein, BlackRock, Manulife Financial's John Hancock, Prudential Financial and UBS also have tried adding annuities with guaranteed payouts to their target-date offerings in the past few years.  Write to Kelly Greene at kelly.greene@wsj.com
Washington is making it easier for workers to purchase lifetime-income products in retirement-savings plans—and insurers are following suit.