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Retirement Planning > Retirement Investing

Ed Slott: The Pros and Cons of Annuities in Retirement Plans

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Welcome back to Human Capital. I’m Melanie Waddell in Washington. After chatting with Senate Finance Committee Chairman Chuck Grassley, R-Iowa, recently about the timing of Senate passage of the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, I checked in with IRA expert Ed Slott to get the lowdown on complaints being lodged that the Secure Act is an insurance industry-backed bill that contains pitfalls for investors.

“The idea is really good,” Slott said of the Secure Act. “I think employees should have guaranteed income, annuity income, for their basic living expenses. A good retirement portfolio has to have some guaranteed aspect of it. Even non-annuity people, not in the insurance industry, will tell you that.”

However, Slott said, there are drawbacks.

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What’s the Secure Act’s goal? Like a pension, the bill “in some sense is saying, ‘maybe you should have a portion of your retirement account guaranteed with income — an annuity,’” Slott says. “There’s a good case for that. I’ve said that on TV many times that, as a basic minimum, most retirees should have at least their basic living expenses covered with guaranteed monthly income, like an annuity.”

From a historical perspective, companies ditched pensions because they “saw that this was a good way to transfer the risk and responsibility of saving for retirement from them, the corporation, to the employees,” Slott says.

Now: “The employees suffer risk; they have to decide what to invest in.” They wonder: “‘What if I lose money? Are there guarantees?’ You get none of that in a 401(k).”

Here’s the problem with the Secure Act: It “removes the plans [or companies] from liability,” and “puts the liability on the insurance company” offering the product.

What sorts of liabilities may crop up? “Somebody always has a problem with a product, especially annuities because they’re hard to understand,” Slott says. “Most employees don’t even understand their 401(k).”

Potential complaints: Investors need to get to the money early and they don’t understand the surrender charges. Or they’re not getting the payments they thought they would have because they didn’t understand the product. “With this bill, you take that up with the insurance company.”

Yet another problem: Lack of due diligence by employers once they start offering an annuity in a 401(k). Investors “don’t know where they [the employer] gets the annuities from,” Slott says. “Will it be a broker that walks through the door and says ‘this is a good deal’ and the employer doesn’t know the difference, doesn’t check it out?”

A big company would likely have professionals “checking out everything and making sure they have a top product. But a lot of smaller companies might not have the wherewithal to do that and accept anything that walks in the door,” Slott says. Investors are worried they’ll “get hammered with fees, and charges and provisions they don’t understand.”

Once the floodgates open up, “you’re going to hear the stories about employees that don’t know what they have, don’t understand what they had … and then they’re going to go to their company and [the company will] say ‘we’re off the hook’ — go to the insurance company. And that’s the negative. I don’t know how you deal with that.”

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