Congress Offers New Level of Protection For Employer 401k and Other Retirement Plans
By Scott Olson // March 21, 2018
Congress Proposes 'Guaranteed Income for Life' options for your 401(k)
House Bill (H.R. 4604) “Increasing Access to a Secure Retirement Act” sponsored by Reps. Tim Walberg (R-MI) and Lisa Blunt Rochester (D-DE) would allow employers to provide workers with Guaranteed Lifetime Income Annuities in their retirement plans.
The Bill would allow employers meet their fiduciary obligations and allow workers to convert their retirement savings into guaranteed lifetime income.
This legislation clarifies current annuity “Safe-Harbor” rules for employers to offer lifetime guaranteed income annuities in retirement plans. If this Bill passes into law, employers could have less liability by offering retirement plans to employee that cannot lose income – even with stock market crashes.
The GAO (Government Accountability office) states “A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security”
Why would Congress promote Annuities? Because Guaranteed Lifetime Income Annuities offer retirees reassurance, knowing that even with another market crash, their retirement income may increase, and is guaranteed for life. Annuities have been popular investments since 1759 (Investopedia.com), longer than the U.S. stock markets.
This Bill proposes to reduce investment risk in retirement plans by passing this risk to insurance companies; just as we do with our auto, homeowners, life, health insurance, and long-term care policies.
Employees with access to Guaranteed Income Annuities in their 401(k)’s, and other company retirement plans, are more likely to save more for retirement, according to a recent ACLI study “Assessing Americans’ Financial and Retirement Security.”
With fear of Social Security running out of money, closing the retirement shortfall is becoming an increasingly important policy goal for many lawmakers. Currently, 45% of Americans are on track to retire with financial security, 20% need to take modest actions to get on track, and the remaining 35% of households need significant help, the ACLI study found.
One of the Biggest Fears many retirees, and soon-to-be-retirees have is whether they can afford to retire or not? Too many retirees lost so much of their life savings in the Crash of 2000, then again in the Crash of 2007, that they don’t know if they can afford to retire. Since these Crashes, many have avoided “Risk,” and as a result, don’t have the nest-egg they may have had, if they had a Guaranteed Income Annuity.
How do Investors Benefit with Guaranteed Income for Life?
Hypothetically, let’s assume that your retirement assets grew to $1,000,000 by the year you planned to retire, just before the Crash of 2007. Then the S&P 500 and your stocks and mutual funds plunged 50% – so much for your retirement! If your retirement assets lost 50% and you planned to draw 5% income, your $500,000 nest-egg would pay only $25,000 per year.
However, if you or your advisor had the insight to invest your $1,000,000 into a Guaranteed Income Annuity paying a minimum of 5% income, your income would be at least $50,000. Guaranteed Income Annuities offer a minimum income of 5%, 6%, or 7%, which will never decrease, however, your income may increase with the investment performance in your annuity (depending on age, company, product and/or additional riders).
Your income will never reduce, even when the markets crash again. Typically, these annuities lock-in, or ratchet, your income higher every year. Then this higher income is locked-in and becomes your new guaranteed minimum income for life.
Are my years leading into retirement any more important?
Absolutely. Typically, it can take seven or more years just to get back to even. The five to seven years, leading into retirement, can be the most important for growth, but you also don’t want too much risk. If you invest too conservatively, you could be short-changing your income at retirement.
For example, if you own a variable annuity and it’s providing you a rollup rate of 7% simple interest to your benefit base and you are 5 years from retirement, even in a down market, your future income from your benefit base would rise to 35% (5 years at 7% simple interest per year). If the variable annuity performance were 15% per year for that same time period, your income would be based on the greater of the 7% simple interest or the market growth. (If the policy had a provision of 10 years or until you take withdrawals from the contract, whichever comes first).
What’s so special about annuities?
What investment, other than annuities (with use of various riders):
- Offer Guaranteed Income for Life?
- Lock-in your highest annual value for your retirement income?
- Offer guaranteed annual increases in your future income of 5% to 8% every year, until you start your income?
- Allow you to grow your assets while retired, drawing income, and continue to lock-in higher income with your investment growth?
- Offer Death Benefit options to lock-in your highest quarterly, or anniversary value for your loved ones in a down market.
Annuities in Good, and Bad Company
Andrew Carnegie, the richest man in the world in his day, loved annuities and loved teachers, so he created the first Teachers Annuity Association (TIAA). Ben Bernanke reported that over half of his net-worth was in annuities. Alan Greenspan owns annuities. O.J. Simpson invested his life savings into annuities to protect him from lawsuits. In Florida, any money in annuities is protected from creditors (lawsuits).
Variable Annuities are lousy investments! REALLY?
According to Morningstar, in 2017 there were 26,168 funds in variable annuities (called separate accounts) which beat the S&P500’s 21.8% growth. Did your portfolio do that well? There were 10,007 variable annuity funds that beat the S&P’s 11.4% annual growth over 3 years, and 4,846 VA funds beating the S&P’s 15.79% over 5 years. There were 8,120 funds in VA’s beating the S&P’s 8.50% over 10 years. In fact, there were 75 funds in variable annuities which made over 60% return in 2017 and 186 funds in excess of 50% return.
Performance is just the beginning
Many variable annuities offer dozens, even hundreds of popular funds covering all major categories for every investor, but that’s just the beginning. Optional Benefits such as Guaranteeing Income for Life, guaranteed increasing income until first withdrawal, guaranteed death benefits for your loved ones, and locked-in investment gains for both income and death benefits, while not inexpensive, offer unique options that many investors want with their retirement planning. Many variable annuity investors believe that the small extra cost of having their life savings Guaranteed for Life is worth it.
Word of Caution! Guaranteed Income Annuities vary greatly from company to company. An advisor with all three licenses (Insurance, Securities, and Investment Advisor Representative) will hopefully understand the huge differences and make the recommendation best suited to you, and your employee’s needs. Variable annuities are sold by Prospectus which details all fees, fund choices, rider charges and risk information.
It’s about Time! Let your Senators and Congress-person know that you support this bill. It may reduce your legal exposure and promote more goodwill with your valued employees. Being one of your own employees, and retirement plan participants, wouldn’t you like your retirement income to be Guaranteed for Life?
ABOUT THE AUTHOR
With 38 years experience in Financial and Estate-Planning, Wealth Preservation and Wealth Transfer, Scott Olson provides required Continuing Education courses to Attorneys, and CPAs in Florida.
His expertise includes the “Substantially Discounted Roth-Conversion” and the Annuity Arbitrage, tax-favored income and estate-tax reduction wealth transfer techniques. He presented the “Substantially Discounted Roth-Conversion” at the Florida Bar Tax-Section, October 2014 conference, and their 1-hour CLE teleconference in March 2015.
All investing is subject to risk, including possible loss of principal. Advisory Services through Atlantic Financial Advisors, LLC (AFA), Registered Investment Advisor. Securities and additional Advisory services offered through Independent Financial Group, LLC (IFG). Member FINRA/SIPC Ÿ AFA and IFG are not affiliated. OSJ Branch: 12671 High Bluff Dr, Ste 200, San Diego, CA 92130.
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