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

Written by Diane Archer

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.

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1 Comment

  • …this, is no solution. 401Ks are pretty much a joke as indeed they are tied to oft volatile market investments that can go nowhere and even wipe out your retirement. All it takes is one of the primary investments in the package to go south, like it did for Disney employees several years ago. Investing in Wall Street comes also with hidden fees which is how fund managers make their income.

    We need to protect seniors, not make them more vulnerable to the Wall Street sharks.

    Sadly as so many jobs do not pay a living wage and people struggle from month to month to make ends meet there is little if anything left to put into traditional savings plans. Also since the demise of the S&Ls over thirty years ago, interest bearing accounts that keep up with or outpace inflation have all but disappeared except for those who can afford a large up front investment. Hence why for so many, Social Security has become the only source of support to look forward to after they have left the workforce.

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