Essentially, there are two parts to saving for retirement. One is the easy part. And that’s saving for our golden years. Most investors understand that they need to save a certain amount per year, invest it well, rinse & repeat. Accumulation is a relatively straightforward process. The second part is the more difficult part of the equation. That’s turning all the savings into a steady stream of income. This is where many investors falter, have difficulty, and ultimately fail.
But that might be changing.
Building on the momentum of the SECURE Act, a new bill in Congress may make the job of having lifetime income that much easier. For investors, the Lifetime Income For Employees Act may be the LIFE-line they need.
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Building on the SECURE Act
Overall, annuities have gotten a bad rap from many pundits and advisors due to their ‘sold’ nature. But these contracts between investors and insurance companies have cleaned up their act tremendously in recent years and can be powerful tools for portfolios, specifically when it comes to providing life-time income for savers.
To help avoid some of the pitfalls with annuity sales and purchases, the recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act included passages that allow plan sponsors to include annuities as an option in workplace retirement plans. By reducing their liability if the insurer cannot meet its financial obligations, the act puts annuities into 401ks and similarly styled plans.
Since its passage in 2019, several plan sponsors have been adding annuities to their plan offerings.
However, adoption remains slow and there still is a massive retirement income gap to deal with. And with programs like social security feeling the strain from retirees, other solutions are needed. And that’s where the Lifetime Income For Employees (LIFE) Act comes in.
The bipartisan bill—introduced by U.S. Representatives Donald Norcross, D-New Jersey, and Tim Walberg, R-Michigan—would allow annuities to be a default investment in an employer-provided 401(k). It does so by amending various rules from the U.S. Department of Labor about qualified default investment alternatives (QDIAs). Under the SECURE Act, laws now protect plan sponsors from liabilities should a QDIA suffer losses or go bankrupt. Under the LIFE Act, annuities could be allowed as the default option under this safe harbor provision.
The Good and thee Bad
The bill is seen as a major step forward in making sure Americans have access to lifetime income in their golden years. Representative Norcross said of the bill, “By creating ‘individual pensions,’ this legislation will provide hard-working Americans with a guaranteed income so they can retire with dignity.”
The demand and need are certainly there.
According to a TIAA survey, less than 34% of employers offer a guaranteed lifetime income (GLI) option like an annuity in their retirement plans. The flip side is that more employees want these options. The same TIAA survey showed that 54% of employees are “very or extremely interested in guaranteed lifetime income within retirement plans.” This is a 3-percentage point increase from a similar survey back in 2020. Moreover, the pandemic was cited by participants as the reason for their growing interest and the crisis has increased anxiety about being able to retire.
With that in mind, the LIFE Act would go a long way to helping make sure savers are able to meet their income needs later in retirement. It would take the deaccumulation problem out of the equation.
However, the LIFE Act isn’t without its warts. And according to opponents of the bill, there are some very big warts indeed. For starters, in the current version of the bill, 401(k) participants would have only six months to opt out of the annuity option if any of their contributions have defaulted to that account. Past this point, savers might incur surrender charges and fees to get their money out. Additionally, savers may be stuck with the annuity if they change jobs. One of the best things about 401ks and the like is their portability and ability to roll them over to new plans or IRAs. The way the bill is written limits flexibility over the long term. Someone’s financial situation in the 20s is often far different than someone who is in their 60s.
The annuities may not deliver as promised either. Most proposed vehicles are set up like target-date retirement funds and, given market conditions, may not provide the income in retirement. Because of the all-or-nothing provision of the LIFE Act, investors may not be able to get the withdrawal rates they desire or need.
Finally, costs could be a factor. Already, many employers have stressed the increased costs associated with adding annuities under the SECURE Act to their retirement plans. If the LIFE Act becomes commonplace, savers will most likely foot the bill for any increase.
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The Bottom Line
The LIFE Act solves a major issue for savers: turning their portfolios into a steady stream of paychecks in retirement. By allowing annuities to be the default option, investors would limit their anxiety and remove a major problem from the equation. However, the bill does limit flexibility and there could be substantial higher costs for savers. It’ll be interesting to see just how the bill plays out in Congress.
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