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When an employee of a company sponsoring a retirement plan comes to retirement, he or she learns that there are a number of ways to take the retirement income. Monthly pension incomes can be taken in several ways. Among the most popular are 1) a life annuity, where payments continue for the rest of the retiree's life, and no payments continue to survivors after the retiree's death; 2) a survivor joint annuity, where payments continue while both annuitant and spouse are living (a reduced payment is made to the spouse for life when the annuitant dies); and ) life and N certain: payments are guaranteed to the annuitant for life, but if death occurs before N years (usually 10), the remainder of the N years of payments are made to a named beneficiary. Typically, retirees choose a single-life annuity, which is normally the form of payment that yields the highest payable benefit. However, with the single-life annuity, payment stops when the retiree dies. Often, this leads to a drastic reduction in money provided to the retiree's survivors; many cases exist, for example, of widows living in poverty as the result of the selection of this option.
In the desire for fairness and equity and as a means to protect the survivors of retirees, Congress passed the Retirement Equity Act of 1984 (REA). The REA mandated, among other things, that all Employee Retirement Income Security Act (ERISA) qualified plans, whether money purchase, defined benefit, profit-sharing or otherwise, consider the rights of surviving spouses. This consideration takes the form of a required survivor joint annuity instead of the single-life annuity as the default payment option.
However, the passage of the REA has created new pressures of antiselection, which occurs when an individual decision to accept or discontinue participation in a benefit plan in some way worsens the financial position of the plan. This tendency toward antiselection has the unintentional effect of reducing the performance of retirement plans. This issue, which has yet to be adequately addressed, needs to be considered by all those who are involved in retirement planning.
SURVIVOR JOINT ANNUITIES
The survivor joint annuity works in a slightly different manner than a single life annuity. A retiring employee is promised a monthly retirement benefit lower...