Lawmakers are considering a proposal to let 401(k) plans include annuities as a “default” investment option.
Under a bill in the House, as much as 50% of a participant’s contribution could be put in an annuity, under certain circumstances. The idea, said supporters of the provision, is to help workers reach retirement with a source of guaranteed income derived from their savings.
“What we’re advocating is introducing the idea of lifetime income to be at least part of a [default investment option] — not the entire amount, but a portion,” said Dan Zielinski, spokesperson for the Insured Retirement Institute, which, in part, represents the annuity industry.
“People have anxiety about running out of money in retirement, so this would be an option to alleviate that anxiety and give them a stream of income … while still retaining the other portion of their investment savings,” Zielinski said.
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The bipartisan bill, called the Lifetime Income for Employees Act, also is included in a draft version of another retirement-related bill that is expected to be formally introduced later this month. It is among the handful of measures pending in Congress that seek to build on the Secure Act, legislation enacted in 2019 that aimed to increase both the ranks of savers and retirement security.
It’s uncertain whether the proposal to let annuities be a default option will make it into any broader retirement bill that supporters hope will be considered this year.
Annuities can vary widely, both in terms of cost and particular guarantees. However, they all generally involve entering into a contract with a provider (typically an insurance company), whereby you hand over your money in exchange for the promise that you’ll receive regular payments across many years (or decades).
As written, the bill would let 401(k) plans include an annuity as a default investment. That’s where your money goes if you contribute to your plan but have not specifically chosen what to invest in (target-date funds, for example, are a common default investment). This bill would allow an annuity to account for up to half of that default option.
The bill grants six months for 401(k) participants to opt out of the annuity if a portion of their contributions are defaulted to it. They would be notified soon after being put in the annuity of their right to choose a different investment.
Beyond that initial window, however, getting out could be harder: It would depend on the specifics of the annuity contract and its so-called surrender charges, said Zielinski.
Generally speaking, those fees can be pretty steep, especially in the early years of an annuity contract. By way of example: An eight-year surrender period might come with an 8% charge in the first year that gradually decreases before reaching 1% in year eight.
That lack of liquidity could be a hindrance.
“If this does come to fruition, there should be flexibility so a worker would have the option to roll over the money to a new employer’s plan,” said certified financial planner Malik Lee, managing principal of Felton & Peel Wealth Management, which has offices in Atlanta and New York.
“Otherwise, you could end up with a lot of plans to keep track of,” he said.
Additionally, he said, it’s important that savers invest money alongside an annuity.
“Putting too much in an annuity could be a risk from a buying-power perspective, because most annuities don’t have annual cost-of-living adjustments,” Lee said.
Although annuities are not currently permitted to be a default investment in 401(k)s, they are allowed in the investment lineup as a choice. However, uptake by plan sponsors has been slow, despite the Secure Act aiming to eliminate companies’ fear of legal liability if the annuity provider were to fail or otherwise not meet its obligations.