America is in the midst of a retirement crisis, and lawmakers are responding by improving the effectiveness of the country’s most popular savings vehicle: employee 401k plans. Here are some reasons why retirement plans are now offering retirement income options, what the legislation says, and what it may mean for employees and HR professionals.
A crisis with a capital “c”
There are three main reasons that Americans have failed to sufficiently save for retirement. The allure of fancy investment products has enticed plan sponsors to make asset growth and inflation protection the priority over more secure options such as insurance contracts.
- Employees taking unsuitable levels of risk and destroying their life savings
- People outliving their savings
- Financial stress interfering with worker productivity
- Increased burden on social welfare programs
These conditions, partially a result of historically poor decision-making during the distribution phase and a lack of secure options, threaten the fabric of our society, and the future of the country.
Plan sponsors are now increasingly demanding more stable options for their retirement plans, ones that provide participants with income that they can not outlive.
Pending legislation to the rescue
Congress is taking steps to redress the savings problem through act such as the SECURE Act 2.0, whose goal is to improve retirement income security. It builds upon the original act which was passed in 2019, and is anticipated to be passed by the end of 2022.
There is another bill in the House called the LIFE Act, standing for “Lifetime Income For Employees”. The most salient provision of this Act is that it makes an annuity one of the default income options in an employer-sponsored retirement account. The annuities will not only remove the investment management burden from the participant, but also remove the risk management of their income component and put it on the annuity carriers’ shoulders.
What is an annuity?
An annuity is an insurance contract that pays out a regular stream of income payments. Annuities are not adjusted for inflation unless there is some type of cost-of-living rider attached.
Most fall into two major categories: immediate and deferred. Immediate annuities start paying the income right away, while deferred annuities accumulate value for a period of time until they start to pay income.
Annuities can also vary by the type of payment they offer. Some annuities provide fixed payments, while others give you a payment that is dependent on some factor, such as a market index.
Here is a list of the common types of annuities:
- Single Premium Immediate Annuity
- Deferred Income Annuity
- Qualified Longevity Annuity Contract
- Fixed Annuity
- Fixed Indexed Annuity
- Variable Annuity
- Registered Index-Linked Annuity
- Contingent Deferred annuity
These are described in detail in this article from The Annuity Expert.
So what does this mean for me?
It’s hard to say what having access to annuities through 401k plans will mean for the average American. The roll out of annuities in retirement plans is in its nascency. It’s not clear at this point how the logistic will work. There are important questions that need to be resolved, for example regarding the pricing and redemption terms.
Americans looking to create retirement income should sit down and create an overall financial plan, one that looks at what your projected cash flow is likely to be up to and during retirement. Taxes, withdrawals, and other considerations should be taken into account.
As all of this can be quite cumbersome, it can be useful to speak with a financial advisor, especially if you are at or near retirement. We are a wealth management firm located in Sparta, New Jersey, and we are happy to answer any questions you may have. Please set up a time if you’d like to speak.
Plummer, Shawn. What Are The Different Type Of Annuities? The Annuity Expert. https://www.annuityexpertadvice.com/what-are-the-different-type-of-annuities/
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.