Don’t count on 401(k) annuity investments for retirement security

Congress appears all too willing to steer more retirement savings to risky Wall Street investments, rather than protecting Americans against predatory actors. The Wall Street Journal reports that a bill just passed in the US House of Representatives would open up 401(k) accounts to more workers and allow them to buy annuities through these accounts. Beware of 401(k) annuity investments, which may come with high costs and no guarantees of additional income in retirement.

The bill, Setting Every Community Up for Retirement Enhancement, or SECURE, Act, is allegedly designed to help people have more income in retirement. People are living longer and retirement costs are rising, making it more likely for people to end up spending all their assets while they are still living.

For sure, we all need to save as much as possible, and it’s good for there to be incentives to do so. But, unlike Social Security, 401(k) plans often have high transaction costs. And, 401(k) investments tend to rise and fall with the market, potentially leaving people with little in retirement savings when they most need it. Giving people another costly and risky 401(k) option is of little if any help.

The House bill is not about making it easier for people to save money or protecting their retirement investments. According to Amy Hubble, an adviser at Radix Financial LLC in Oklahoma City, the legislation is “an excuse to allow insurers better access to the $5 trillion U.S. 401(k) plan market.”

The House bill is designed to promote 401(k) plan annuities–guaranteed monthly income in retirement. It allows people to invest their 401(k) money with insurers offering annuities. At the same time, the House bill protects employers responsible for choosing these annuity investment options even if the insurers are poorly rated by credit rating agencies, financially unstable, offer a low-value product or go out of business and don’t pay the annuity claims. It does not appear to protect consumers against these risks.

Jeff Hauser of the Revolving Door Project at the Center for Economic and Policy Research told The Intercept that “This bill is an open invitation to prey upon people who are exceedingly likely to lack meaningful access to a lawyer.”  The bill allows insurers to charge high fees for their annuity products and to offer variable-income or indexed annuities that can end up delivering little if any income in retirement, as well as fixed income annuities.

Rather than promote these risky annuities, why won’t Congress let people invest more money in Social Security for a guaranteed cost-effective annuity or better still, lift the cap on Social Security contributions?

There are a few helpful provisions in the SECURE Act. Among other things, it would allow people to continue investing in IRAs past the age of 70.5. And, it would delay the time people must withdraw money from their retirement accounts until 72 from 70.5.