The SECURE Act gives retirement savings a makeover
“A small miracle occurred in Washington last month. Amidst all the political infighting and chaos, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (or SECURE) Act, with overwhelming bipartisan support. The bill…expands access to work-place pension accounts and makes it easier to offer annuities….” —It’s time to get over how much we hate annuities, Quartz
Unless you’re one of the few Americans looking forward to a pension, it falls upon you to plan for your retirement, from maxing your 401(k) match to picking wise investments for your IRA. But what about the responsibility of handling those stashed-away funds once you’ve reached retirement age? Calculating how much to take out of one’s nest egg year per year has never been simple, but it’s becoming an even greater challenge as Americans live longer. Add to this the vast number of Baby Boomers who are financially underprepared for their golden years, plus warning signs about Social Security, and a retirement crisis looms. (How many times have you read that headline?)
The issue is so troubling that it has even managed to overcome partisan gridlock in Congress. With the House’s passage of the SECURE Act late last month, followed soon after by the Senate’s ongoing and largely cooperative deliberation, it seems major retirement reforms are likely to become law by the end of 2019.
One proposed overhaul? A reworking and rebranding of an existing, if notoriously unpopular, retirement option: annuities.
Never heard of an annuity? Your employee benefits administrators and the financial advisory industry—and some consumer advocates—have been working hard to keep it that way. Financial advisors love to hate on annuities (sometimes rightly so) because they often come with costly fees and are confusing for consumers to purchase. Plus, under current law, any company that offers an annuity as part of its retirement package is vulnerable to lawsuits from workers dissatisfied with the product.
So why give annuities a boost? First, some background: Annuities aren’t retirement savings accounts, like 401(k)s or IRAs. They’re more like an insurance policy you take out on your retirement years. Here’s how they work: You give your retirement funds to an insurance company, and in exchange, after you reach retirement age, you receive a guaranteed income each year for the rest of your life. On the plus side, this adds predictability to retirement income. On the down side, with some types of annuities, if you die early (i.e., before your savings would have run out) your heirs don’t inherit any undispersed money. It’s a model that mimics both Social Security payments and the old-fashioned “defined benefit” plans (aka pensions) many American workers once got through their jobs. Some economists think that widespread adoption of annuities could give underprepared retirees badly needed structure in income planning.
The SECURE Act aims to give consumers better access to annuities—starting by making them less frightening to employers who sponsor retirement plans. Recall that currently an employee who gets an annuity through their job may sue their employer if they come to believe the product is not in the employee’s best interest. The SECURE Act sets up a “safe harbor” provision that passes legal liability back to the insurance companies originating the plans (who act as fiduciaries, which in this case means annuity originators are required to inform employers about what annuity plans are in their employees’ best interest).
If they’re no longer afraid of getting sued, the thinking goes, more companies may begin to offer annuities. The SECURE Act also mandates a “nudge”: 401(k) statements would have to show how much retirement income employees’ savings could purchase if placed in an annuity.
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Of course, making annuities easier to access won’t fix the sad fact that Americans simply don’t have enough saved for retirement. Other provisions of the SECURE Act may help some on that front: The House bill raises the age for required minimum distributions (when you must start tapping any retirement account other than a Roth IRA) from 70½ to 72, allowing extra time for growth. Another provision removes an age cap of 70½ that has prevented workers from continuing to build up their traditional IRAs.
Still, there’s something communitarian-and-yet-corporate about annuities that could appeal to millennials and Gen Zers—generations of Americans willing, for a monthly fee, to entrust their lunch orders to MealPal, their music libraries to Spotify, and their clothes, wine, books, and jewelry to every subscription box under the sun. And while it’s impossible to tell whether annuities can revolutionize retirement, Congress is hoping this rebrand is a first step.