In testimony before the ERISA Advisory Committee last month, Teresa Ghilarducci, the Irene and Bernard L. Schwartz Professor of Economics and Policy Analysis at The New School for Social Research, claimed private-sector annuity products were in a state of market failure.
“Allowing annuity products into 401(k) s and IRAs will not likely solve a significant portion of the retirement crises and may cause even more problems and predation,” said Ghilarducci in written testimony.
She and other economists on the Bipartisan Policy Center’s Commission on Retirement Security have previously examined the role annuities could potentially play in creating a guaranteed lifetime income stream for retirees.
BPC’s Commission looked at the “pitfalls and potentials” of annuities for 401(k) savers.
“We were concerned about the pitfalls, and therefore were not excited about the potential,” testified Ghilarducci, who counted high fees, product complexity, and the “insecurity” of commercial annuity products as strikes against facilitating wider access to the products in defined contribution plans.
Moreover, the limited savings of most plan participants and IRA owners would translate into a paltry monthly lifetime benefit for most, she said.
“At the very least we were concerned about the ‘junk’ that might end up in the plans,” said Ghilarducci of the Commission’s work.
Benefits for few
Ghilarducci is a long-time critic of the country’s private-sector retirement system. She co-authored “Rescuing Retirement” with Hamilton (“Tony”) James, Executive Vice Chairman of Blackstone. They lay out a plan for mandatory retirement savings accounts, to which employers and employees would contribute 1.5 percent of annual salaries in government-backed accounts. Savings would be paid out in annuities.
Her testimony before the ERISA Advisory Committee reads as a not-so-tacit rebuke of insurance companies.
While surveys of retirement savers show high levels of interest in guaranteed income products, take-up rates are low.
“Sadly, we are aware, most workers want a fixed annuity. But industry wants to sell variable annuities,” writes Ghilarducci.
“Fees for variable are triple of fixed. And the insurer always wins – they have to, they have a duty to shareholders. An anonymous expert and practitioner told me ‘Market up, insurer gets a big cut. Market down, insurer cuts return to payee. Surrender charges if try to cancel’,” she added.