Adding Annuities to Your 401(k)? No Thanks, D.C.

By Steve McDonald, Wealth Retirement, Tuesday, August 13

Here’s your “Slap in the Face” Award for this week. And this one is really going to tick you off. Fair warning.

There’s a bill in the House right now introduced by Congressman Richard Neal that, in addition to other changes, would allow annuities to be sold as 401(k) investment options.

On the surface, this looks like a great idea. Some annuities offer guaranteed income for life, which would simplify retirement planning significantly. But if you know anything about these insurance products, it’s just another bad deal for the little guy.

In their purest form, annuities are a great idea. You pay an insurance company a certain amount of money, it guarantees you income and, in some cases, guarantees minimum returns for life.

The problem is that most annuities are incredibly complex. Even the most experienced money pros have trouble understanding their ins and outs, and most annuities are horrendously expensive to buy and own.

Add the complexity and expense to the fact that a recent report stated that the language in the bill does not require providers to use the lowest-cost products in retirement account applications, and any positive effects of this change just went out the window.

The unfortunate part of this situation is that there are good annuities out there that are transparent, reasonably priced considering the benefits they offer and easy to understand. But the way this bill is written, it’s very unlikely we’ll see those in 401(k)s.

If the bill Congressman Neal introduced included language that had a fiduciary tone, I’d be the biggest cheerleader for its passage. But in its present form, this one stinks.

And this situation gets worse.

According to the Bloomberg piece I read, Congressman Neal is playing the Washington lobbyist game with our retirement accounts.

It seems the three largest donors to Congressman Neal are MassMutual Life Insurance, FMR (the parent company of Fidelity Investments), and the National Association of Insurance and Financial Advisors.

This is like letting a fox loose in the henhouse.

There are good parts to the bill that Neal introduced. It makes it easier for small employers to offer 401(k) plans and increases age limits for the required minimum distributions from tax-deferred accounts. Both are great ideas.

But annuities, at least the kind that would be allowed by the language in this bill, are just more of the same overpriced type that benefit the salesman first – the same ones that the insurance industry has been peddling for decades.

If you have followed me for any amount of time, you know I am a proponent of annuities in certain retirement scenarios, but not this one.

I haven’t heard any word yet about the likelihood of this particular part of the bill making it through committee, but if it does, make sure you know what your annuity options cost upfront and annually, or avoid these things like the plague.

That’s it for this week. Be careful with your money – most of us have no way to replace it.

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