Confusing Options May Be Coming to Your 401(k). It Could Cost You

The proposed changes are part of H.R. 1994, the Setting Every Community Up for Retirement Enhancement Act of 2019, which passed the House with an overwhelming bipartisan majority on May 23. The bill would also allow small businesses to band together to create retirement plans and broaden the uses of college savings accounts. Leaders in the Senate are now pushing to take up similar legislation, which also has wide support and was first introduced in 2016.

[Read Ron Lieber’s simple annuity explainer here.]

Annuities can be part of a well-founded retirement strategy. Typically, workers invest in low-cost stock and bond funds to build a nest egg, then use some of that money to buy a simple annuity, which provides regular checks for the rest of their lives. Experts say some variation of this strategy is usually the most efficient approach to recreating a paycheck in retirement.

More complex annuities, like so-called indexed annuities and variable annuities, are less common in corporate 401(k) plans but could become more mainstream if the bills become law. These products are more lucrative for insurers because they tend to have higher costs in return for the extra features they add.

Equity-indexed annuities, for example, guarantee you won’t lose money — and if a certain index, like the SP 500, rises, the insurer will credit a portion of any return to your account. Variable annuities allow you to choose how to invest your savings and are often sold with so-called guaranteed lifetime withdrawal benefits, meaning you can receive regular checks and still have the option to take back some of your money.

But these features come with extra costs, which are often hard to decipher.

“The insurance companies won’t sell budget, simple immediate annuities — the kind most of us want,” said Teresa Ghilarducci, a professor of economics at the New School for Social Research and an expert in retirement policy. “They will sell variable annuities that are typically complicated and overwhelmingly expensive to be appropriate for most families.”

Article source: https://www.nytimes.com/2019/06/04/your-money/retirement-bill-annuities.html?emc=rss&partner=rss