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Should your 401(k) pay you an automatic annuity by default? Why it’s a problem in 2022

It’s a simple bill, and it’s also short: the Employee Lifetime Income Act, or LIFE Act, introduced in mid-February as the HR 6746, has one goal: to allow employers to cancel their employees’ 401(k) investments, not only in (now) traditional “target date” funds, but also in annuity contracts. Specifically, for any employer who chooses to do so, the legislation would allow them to automatically allocate up to 50% of an employee’s contributions to an annuity contract, as long as the employee is able to transfer these investments in the 180 contribution.

As CNBC explained in a March 9 article,

“The bipartisan bill, called the Employee Lifetime Income Act, is also included in a draft of another retirement-related bill that is expected to be officially introduced later this month. He is among the handful of measures pending in Congress who seek to build on the Secure Act, a law enacted in 2019 that aimed to increase both the ranks of savers and retirement security.

“It’s uncertain whether the proposal to let annuities be a default option will make this a broader retirement bill that supporters hope to see considered this year.”

That same article also quoted Dan Zielinski, a spokesman for the Insured Retirement Industry, an annuity trade group,

“What we’re advocating is to introduce the idea that lifetime income is at least part of a [default investment option] — not the whole amount, but a part . . .

“People are afraid of running out of money in retirement, so this would be an option to alleviate that anxiety and give them a stream of income…while retaining the other part of their investment savings.”

Now, I’m all for retirees converting some of their assets into annuities to protect against the survival of their assets – but this bill would go further: it’s not about those conversions, but about investments in deferred annuity products over working life. As a reminder, deferred annuities are an investment product that made sense in the days before the 401(k) because it offered the same tax deferral as a 401(k), but at a substantial cost in terms of fees and redemption. charges. In 2022, it makes no sense to use deferred annuities rather than buying an annuity at retirement when you’re ready to buy that long-term asset protection.

Of course, this provision is unlikely to go anywhere, and even if it did, it’s hard to imagine any employer choosing this for their employees, so it’s easy to override it. But there are real issues around investment decisions and, indeed, around the investment choices available to Americans nearing retirement. A traditional annuity should be a viable option for them — but it isn’t, in part because of the very low interest rates older Americans face. After all, annuity providers, in order to make their guarantees, invest in bonds and other safe investments; when these interest rates are low, it drives up the cost of annuities.

Readers may recall that in early January I wrote that actual asset allocations for retirees appeared to be riskier than the experts recommend, and it’s hard to blame them for that. while bond yields have cratered so much, leaving retirees little choice if they want to maintain the same expectation of asset returns. And in November, I wrote a little history lesson, going back to the Japanese response to their experience with low bond rates, starting in the 1990s, when domestic investors sought out junk bonds and currency exchanges. currencies in response.

Now it turns out that Americans are considering their own high-risk investment in response to low interest rates — or at least the Department of Labor fears that might happen and issued a warning“In recent months, some financial services companies have begun marketing cryptocurrency investments as potential investment options for 401(k) participants. . . . [A newly-issued DOL] The press release warns plan trustees to exercise extreme caution before considering adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants. For more on this, my Forbes colleague Erik Sherman outlines why cryptocurrency isn’t suitable as a retirement investment (although I guess I’ll have to point out to him that he’s wrong in his history 401(k) ).

And at the same time last week, NBC News reported:Biden takes big step toward government-backed digital currency.” Now, I don’t present myself as a digital currency expert; I can be confident both that the benefits would be substantial and that the risks to civil liberties are also significant. But what struck me were the comments of David Yermack, chairman of the finance department at New York University.

“In addition to consumer benefits, a US digital currency would give the Fed a new tool that economists have so far only theorized about: negative interest rates.

“Interest rate controls are the Fed’s primary means of stimulating or cooling the economy, but it has limits. Banks can only lower interest rates on regular money to such a low level, known as the zero terminalleaving central banks with few options when interest rates are already low and the economy needs a boost.

“With a digital currency, the zero limit does not exist, allowing for aggressive action when needed.

“’If the money is electronic, the government can just erase 2% of your money every year,’ Yermack said.

How can retired and near-retirement Americans, who are reaching the age when experts tell them to invest in less risky assets, react to perpetually low interest rates – especially in circumstances such as those we are currently facing, where they are associated with high rates? inflation? It sounds absurd – yet it is indeed our reality, and I am beginning to wonder if the lack of attention given to this problem is not because so many experts have simply convinced themselves, with their concerns about the insufficient retirement savings of Americans, that this problem does not exist.

As always, you are welcome to comment on!