Last week, the House passed a major piece of legislation that garnered a tiny bit of attention… and was then lost in the usual swirl of outrageous tweets and celebrity drama.
The Senate is expected to pass a very similar bill, and the president will sign it.
The Setting Every Community Up for Retirement Enhancement, or Secure, Act passed 417-3, which represents overwhelming bipartisan support in an age when the two sides cannot agree that the sky is blue. (I’m sure blue sky deniers are a thing.)
There are a few good nuggets in the bill and one absolutely horrible aspect that will potentially derail retirements for millions of Americans.
Perhaps the most beneficial provision of the law is that it raises the required minimum distribution (RMD) age from 70 1/2 to 72. That gives investors an extra 1 1/2 years to grow their savings tax-deferred.
Some other features of the bill include requiring certain part-time employees to be included in a company’s 401(k) and allowing small businesses to team up to offer 401(k)s to employees.
But here’s where employees and retirees are going to get screwed…
The new law now makes it easy to include annuities in 401(k)s.
If you’ve read my work on Cashflow For Retirement for even just a little while, you know that I despise annuities. They’re very expensive and complex, they have lots of restrictions, and they underperform.
I dislike them so much that the chapter on annuities in my book “You Don’t Have to Drive an Uber in Retirement” titled “The Worst Investment You Can Make.”
Previously, 401(k) plan providers had the fiduciary responsibility to ensure that all investment options offered in their plans were appropriate (that is, not too costly and would help investors achieve their goals). As a result, annuities were almost never included in the plans.
The new law puts the onus on the insurance companies that sell annuities—so the people who make all the fees and commissions will determine if their products are too costly and complex.
What could possibly go wrong? Talk about the fox guarding the henhouse!
Follow the Money
How did annuities even find their way into the Secure Act?
Over the past two years, the top 10 life insurers that sell annuities spent more than $46 million on lobbying Congress.
Additionally, these companies contributed nearly $5 million to congressional campaigns in 2018.
The biggest was a $54,350 donation to Rep. Kevin McCarthy (R-Calif.) by MetLife. In fact, MetLife was the largest check writer to candidates, disbursing $2.4 million in funds.
The bill’s sponsor, Rep. Richard Neal (D-Mass.), ran a 2017–2018 campaign. His second-largest contributor, Massachusetts Mutual Life Insurance, commonly referred to as MassMutual, paid the congressman $36,550—I mean, “contributed that amount to his campaign.”
(Guess what MassMutual sells in addition to life insurance? You’ve got it—annuities.)
Clearly it was worth it, as MetLife, MassMutual and the others will now be able to peddle their annuities to 401(k) investors, who will be charged sky-high fees and commissions on top of what they already pay for their 401(k)s.
What’s So Bad About Annuities?
People like annuities because they guarantee income later in life. Who doesn’t want guaranteed income?
But those guarantees come at a cost—a big one.
First, there’s the actual cost—the commissions on annuities are huge. Brokers have large incentives to get you into an annuity (versus an index fund, where they’ll make next to nothing). That means less of your money is working for you.
There’s also opportunity cost—the price for your guaranteed income includes the potential missed opportunity of investing in something that would have appreciated.
I’m not talking about finding the next penny pot stock that’s going to $100 per share. A simple stock index fund over the long term will generate far greater returns than an annuity will. By locking up your money in an annuity, you won’t participate in much or any market upside.
And your money is locked up. If you want it early, you will pay through the nose for it.
For example, you may be reading this article and thinking to yourself, “My God, what have I done?” If you call your annuity broker to withdraw your money, you may have to surrender (they’re called surrender charges) 7% of your capital if it’s in the first year, declining by 1% every year after that.
Some annuities keep your money if you die before you’ve received all of it back. Don’t want that to happen? Then you pay higher fees to ensure your funds are returned to your family.
Variable annuities, which are often tied to equity indexes, are the worst.
In a paper by Dr. Craig McCann of UCLA and Dr. Dengpan Luo of Yale University, the two professors concluded that when it comes to equity index annuities…
“No registered rep (representative), insurance broker, or retail investor, and precious few finance PhDs, could understand these products. The net result of equity-indexed annuities’ complex formulas and hidden costs is that they survive as the most confiscatory investments sold to retail investors.”
“Confiscatory”—as in they take your money.
So the insurance companies gave Congress boatloads of cash so that they can push their expensive and underachieving products into your 401(k).
Don’t get me wrong… there are some much-needed improvements to retirement accounts in the Secure Act.
But the addition of annuities in a 401(k) is the opposite of an improvement. And all of the other positive changes won’t make up for the destruction of millions of retirements caused by these awful and expensive products.