The SECURE Act is one step closer to becoming law, and with it, Americans would see a few tweaks to the way the retirement system works.
As part of the SECURE Act, which the House of Representatives passed last week, individual retirement accounts’ age cap would be lifted, small businesses would have more avenues to offer retirement plans to their employees and part-time workers would get access to 401(k) accounts. The legislation would also boost the use of annuities in retirement accounts — something that may tilt a few heads considering the bad reputation annuities typically get for being an upfront expense with an uncertain payout (such as, if the owner of an annuity dies before reaping the benefits, or being tied to a seven- to 10-year contract).
Currently, plan providers have the fiduciary responsibility to vet annuities but under the safe harbor provision of the SECURE Act, the onus would be placed on insurers to provide employers with the right products. Employers would be given guidance on how to ensure those providers and their products are up to par, including reviewing the insurers’ status under state insurance regulation and enforcement.
Some people may be afraid of annuities, but others say they’re a benefit and more savers could use them. “This critique is anti-consumer and a thinly-disguised effort to discourage employers from offering workers in today’s economy a way to lock in a lifetime stream of income through their 401(k), like a traditional pension offers,” said Jack Dolan, spokesman of the American Council of Life Insurers, a member organization of insurers.
Defined benefit pensions, which are not as common in the private workforce anymore, were similar to an annuity, in that they provided guaranteed income. “Certain types of annuities utilized in retirement plans can replace the void left by the demise of traditional pensions,” said Byrke Sestok, president of Rightirement Wealth Partners in Harrison, N.Y.
The pros:
Annuities get people thinking about the long-term, and the extra long-term. Not only do they provide a benefit for retirees, but they do so for the course of their lives, which can be longer than anticipated, said Mark Germain, a financial adviser at Beacon Wealth Management in Hackensack, N.J. Rolling over a pension to an annuity can be a good choice for people without a strong plan, as it gives people the ability to have a consistent income in retirement.
Easier access to annuities in retirement plans might also eventually discourage workers from withdrawing retirement assets too soon, said Malcolm Ethridge, a financial adviser at CIC Wealth Management in Rockville, Md. Employees currently have to pay a 10% penalty to withdraw assets if they’re under 59 ½ years old, but there would be an additional fee from insurance companies for withdrawals from annuity contracts. “That will be enough of a deterrent,” he said. “Or maybe the insurance company won’t even allow you access to more than 10% of your balance per year.”
The cons:
Employees do get to determine how much of their retirement account is invested in an annuity. The downside, however, is that they can be complicated and employers may not choose the best options available to workers, Sestok said.
Not understanding how an annuity affects a plan can hurt investment prospects, Germain noted. An annuity product might seem like a double tax benefit, but it could also lead to higher costs, less flexibility and disappointment. “The new bill does not adequately address the lack of communication on the value or lack of value the annuity inside a pension provides,” he said. “Education is needed for all potential retirees on this topic.”
Annuitization will also come with more fees, and participants will likely have to pay. “Increasingly the ‘consumer’ is expected to take on more and more responsibility to make sure that they are not being taken advantage of by institutions that at a fundamental level are designed to maximize profit,” said Eric Dostal, a financial adviser at Sontag Advisory in New York. “If not highly regulated, this proposal will result in adverse consequences for plan participants who choose to purchase annuities.”
As is common with all personal finance advice, whether someone should have an annuity in their 401(k) plan depends on numerous factors and their individual situations, said Lora Hoff, a financial adviser in Dallas. “The truth is that to say ‘you should never put an annuity in a retirement plan,’ is naive and leaves out acknowledgment that there can be situations, and riders particularly, that can create a great outcome with an annuity in a retirement plan,” she said.
