Annuities Do Not Belong In 401(k) PlansAdvisor Perspectives
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Several weeks ago I wrote about the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which will reform various aspects of US retirement laws. The Act was passed by the House in May and is currently stalled in the Senate.
One of the most troubling of the SECURE Act’s 29 provisions is that it will ease regulations to make it easier for financial salespeople to sell annuities to 401(k) plan participants. I am speaking primarily of variable annuities (VAs) and fixed-index annuities (also known as equity-indexed annuities).
This is alarming, as the Act creates a safe harbor for annuities inside 401(k) plans. That means companies choosing to offer annuities would be shielded from liability – no matter how terrible an investment the annuity products may be. This provision has great potential for harm.
Annuities seem always to be a hot financial product in the market place. It’s rare when I interview a new client that they don’t have at least one in their portfolio. Often, it’s the only investment they own. Annuities are not hot because consumers are clamoring to buy them, but rather because annuity salespeople love to sell them.
While I rarely recommend them, there are some good things about annuities, especially that earnings grow tax-deferred until distributed. They can be useful in this regard in special situations – when stripped of their high fees and commissions. Therein lies the problem.
Most annuities sold by salespeople inherently contain high fees, big commissions and high penalties to consumers for taking money out early. What that means for the investor is low returns. For those reasons, the negative aspects of annuities far outweigh any good.
Even worse, annuities have no place being owned by an IRA or, as the SECURE Act would allow, a 401(k) plan. Regardless of fees or commissions, no annuity belongs in a retirement plan. One of my top pet peeves as a financial planner is so-called “financial advisors” who sell people fixed and variable annuities for a retirement account. This makes no sense.
An annuity is a tax-deferred container to put investments in, not an investment itself. It’s what investments are inside it that matters. The same is true of IRAs and 401(k) retirement plans. Since a retirement plan is already a tax-deferred investment container, it makes no sense to put an annuity – another tax-deferred investment container – inside of it. The silliness of this is obvious to even the most casual observer, unless your livelihood depends on selling these products.
Read the full article here by Rick Kahler, Advisor Perspectives