Americans may soon see some welcome changes to the rules governing their retirement savings plans, including the ability to contribute to their individual retirement accounts longer.
But the same bipartisan bill could also make retirement planning even more confusing, particularly for workers hoping to recreate the pensions of a bygone era.
Among the two dozen or so rule changes is a provision that is strongly supported by insurance companies but has consumer advocates worried. It would eliminate some of the liability for employers who add annuities to the menu of options for their 401(k) plans — including expensive and complex products that purport to offer the peace of mind of a guaranteed income stream.
The proposed changes are part of a bill that passed the House with an overwhelming bipartisan majority last month.
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.
More complex annuities, like so-called indexed annuities and variable annuities, could become more mainstream if the bills become law. These products end 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 S&P 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. But these features come with extra costs.
There is often little benefit to saving your money inside products like variable annuities over many decades because of the high costs, experts say, which leaves you with less money once you reach retirement.
The legislation is intended to make employers more comfortable embracing annuities. Some experts worry that companies will be more likely to choose problematic products, in large part because they often rely on brokers to educate them about complex annuities. And these brokers are typically not required to put the customer's interest first.
"It's possible that the safe harbor will be marketed in a way that makes plan sponsors, and particularly small plan sponsors, believe that they don't need to review the annuities at all," said Fred Reish, a lawyer and fiduciary expert. "That would be a mistake."
Tara Siegel Bernard writes for the New York Times.
