Congress may be about to rewrite the rules of retirement saving, but consumer groups worry that one change could be costly for unwary investors.
The Secure Act, which passed the House last month 417-3, aims to make it easier for employers to offer 401(k) plans and for employees to accumulate money in them. In one important change, it would no longer allow employers to exclude part-time workers from the plans.
The bill also would let small businesses band together to offer multi-employer plans, with tax credits to defray startup costs. It would let retirees wait until age 72 to begin withdrawing money and paying taxes, up from 70½ now.
Barbara Roper, director of investor protection at the Consumer Federation of America, is fine with all of that. What she doesn’t like is a provision in the bill that opens the door to sellers of annuities within 401(k) plans.
The change is called a safe harbor, meaning that employers who follow certain legal steps couldn’t be sued over the choice of an annuity provider. The insurance industry pushed for the change, arguing that workers need a way to purchase a steady stream of retirement income.
Roper recognizes that need but argues that the safe-harbor language was written too loosely. For one thing, she says, it doesn’t require employers to consider the financial strength of the company issuing the annuity. An insurance company bankruptcy could leave unsuspecting workers in the lurch.
Just as important, the bill doesn’t restrict the kinds of annuities that qualify for the safe harbor. Roper argues that a simple fixed annuity would be appropriate in a 401(k) plan but that other types, such as variable or equity-indexed annuities, would not.
Variable and indexed annuities are hybrids of insurance and investment products. Their returns are tied to a benchmark, such as a stock market index, and they tend to have far higher costs than other investments, such as a mutual fund.
“We have a real problem with abusive sales practices in the sale of variable and fixed-index annuities, and with very high sales costs,” Roper said. “We would hate to see these products make their way into the ERISA market.” ERISA, the Employee Retirement Income Security Act of 1974, is the federal law governing retirement plans.
Larry Swedroe, chief research officer at Buckingham Strategic Wealth, says annuities within a 401(k) would be helpful to many people. An immediate annuity could help a retiree lock in a guaranteed income stream, or a deferred annuity could serve as a form of longevity insurance, with payments beginning at perhaps age 85.
Swedroe agrees with Roper, though, that variable and indexed annuities have no place in a retirement plan.
“I would make it only applicable to payout annuities — no variable annuities,” he said of the safe-harbor provision. “Also they should only be allowed to be sold without a commission. Then you’d have no incentive for somebody to sell something inappropriate.”
Congress, unfortunately, doesn’t seem to have any interest in tying the insurance salespeople’s hands. The House’s safe harbor looks wide enough to allow a boatload of high-cost annuities into the 401(k) market.
The Secure Act seems to have a lot of momentum, although the Senate hasn’t decided whether to vote on the House measure or advance its own similar bill. If senators really want to ensure American workers a secure retirement, they should seize the opportunity to write a much stronger annuity standard.