Annuities in retirement plans? Revived bill aims for a leap

Lawmakers revived a push to put annuities in Americans’ retirement plans, reintroducing a bill that would let companies make the complicated insurance contracts the automatic go-to when savers waffle about where to invest chunks of their money.

U.S. Reps. Donald Norcross, a New Jersey Democrat, and Tim Walberg, a Michigan Republican, reintroduced the Lifetime Income for Employees Act on Feb. 15, refreshing a bill they originally brought forth in late 2020.

Known as the LIFE Act, the bill would let companies make annuities the default option in their employer-sponsored retirement plans when savers don’t specify how they want up to half of their 401(k) money to be invested. Plan sponsors would not be required to offer annuities. Savers automatically kicked into the contracts could opt out within 180 days if they later decide they’d rather be in stock or bond funds.

The decline of pension plans, a lack of savings and an aging population are fueling ideas about how to secure America's retirement future.
The decline of pension plans, a lack of savings and an aging population are fueling ideas about how to secure America's retirement future.
Bloomberg News

Annuities are often cast as investment products, but they’re technically insurance contracts. Investors typically fork over a hefty sum up front in exchange for future income payments. In past decades, annuities have been synonymous with high costs, onerous terms, confusing jargon and cheesy sales pitches to elderly or vulnerable investors by commission-hungry brokers. In recent years, they’ve developed into an industry that includes fee-based products and a welter of different flavors.

Variable annuities, which are regulated by the SEC and are functionally mutual funds inside an insurance contract, draw the most criticism for their high costs, steep upfront charges, ability to lose money and hefty “surrender” charges for getting out early.

Love me, love me not
The contracts live in a polarizing corner of the financial planning industry, with independent advisors either loving them or hating them — mostly the latter. “Annuities: Just Say No,” says the website of David Marotta, the president and CEO of Marotta Wealth Management, a fee-only financial planner in Charlottesville, Virginia. Marotta said in a brief interview that annuities “are usually couched in terms to make them sound like an investment. But they’re just giving you back your own money” at a lower rate than you would get than in a traditional investment. “A lot of this stuff is just trying to confuse the public, and the legislation will, too,” he added.

David Stone, the co-founder and CEO of RetireOne, an annuities distributor based in San Francisco, countered that if the bill passes, it “will help plan participants have better access to a pension-like guaranteed income stream for life.”

By putting annuities in 401(k)s, the bill could blunt the impact of advisors who dislike them.

The bill originally emerged one year after the Secure Act changed scores of rules for retirement plans, including relaxing strictures on the ability of employer-sponsored plans to include annuities. While that 2019 law was designed to boost Americans’ retirement nest eggs and made it easier for companies to offer annuities in 401(k) plans, very few companies have embraced the notoriously complex products. BlackRock, the world’s largest asset management firm and an early adopter, made them a default option last year.

Federal retirement plan laws from 1974 known as ERISA require plan sponsors to exercise fiduciary care — meaning to act prudently and use diversification across different asset classes to minimize the risk of large losses for a retirement saver. Companies have shied away from offering annuities in their 401(k) plans because they fear an insurer might go belly up, leaving savers high and dry and the companies open to lawsuits. The revived bill would in theory remove companies’ legal fear of offering the products.

Safeguards
The bill says that if a saver doesn’t select investment options for all of her 401(k) money, the undesignated part would be automatically “defaulted” into an annuity. No more than 50% of her 401(k) could hold the contracts, a threshold the legislation says would protect investors by keeping their portfolios diversified across stock and bond funds. The saver would be notified of the investment within 30 days and has the option to reallocate the money into a stock or bond fund within 180 days without incurring any financial penalties. The five-page bill doesn't specify what kind of annuity a retirement plan could offer, only that it provide "a general description of the annuity contract, including the duration of guaranteed payments and identification of the insurer."

Britton Burdick, a spokesman for Rep. Norcross, said in an email that the reintroduced legislation was “substantially the same as the original,” save for one element: a requirement that a retirement plan give savers a second notice 30 days before the initial automatic investment in an annuity. “We added an additional notification requirement to ensure additional consumer protections,” he said. The bill next goes to the House Education and Labor Committee, where both Norcross and Walberg are members, for review before being put to both the full chamber and the Senate for a vote. No deadlines have been set.

Annuity sales hit their highest level in 14 years in 2021, according to preliminary estimates from industry research organization LIMRA’s Secure Retirement Institute. Sales rose 16%, to $254.8 billion, compared to 2020, mostly for variable annuity contracts and registered index-linked annuities.

The retirement problem
A steady drumbeat of scary news about Americans’ lack of financial readiness for retirement is helping to drive the bill. So are the demise of defined-contribution pension plans and longer lifespans.

“We know employees are increasingly relying on an employer-sponsored plan’s defaults, and we believe it’s high time that one of those default choices is annuities, which can provide a protected lifetime income stream that so many Americans need,” said Jason Fichtner, a senior fellow at the Alliance for Lifetime Income’s Retirement Income Institute.

But in referring to “default investment arrangements in annuities” that can shore up Americans’ retirement security, the bill walks a fine line in calling them neither an investment nor an insurance contract. “By creating ‘individual pensions,’ this legislation will provide hard-working Americans with a guaranteed income so they can retire with dignity,” Rep. Norcross said in a Feb. 15 statement.

In a Feb. 15 letter, the Insured Retirement Institute, the industry’s main trade group and lobby, wrote to lawmakers in support of the bill, saying that it would “go a long way toward helping address the insecurity and anxiety workers and retirees across America are feeling today about their ability to accumulate sufficient savings to provide them with income that will last throughout their retirement years.” The institute, whose members account for more than 90 percent of annuity assets in the U.S., is one of six industry players lobbying for the new law, including the Investment Company Institute, TIAA, Aegon, Nationwide and Pacific Mutual Holdings.

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Retirement Annuities Politics and policy 401(k) Fiduciary standard
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