The House of Representatives recently passed a bill that may complicate retirement planning options for Americans.
The House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 on May 23. If enacted into law, it could be tricky for Americans who are not financially savvy investors.
Some of the changes could benefit consumers: The law encourages more small employers to offer 401(k) plans and raises the age for required minimum distributions (RMDs) from retirement accounts to 72 from 70.5, a nod to longer life expectancies and later retirements.
However, there are some changes that consumers should be wary of, experts say.
For example, one change in the law would shorten the amount of time that someone who inherits an Individual Retirement Account (IRA) can hold onto the funds, potentially causing them to lose money.
“If you inherited my IRA — before I’d be able to stretch the distribution over your lifetime, which is more time for dollars to grow tax deferred. Now you have to drain that inherited IRA over 10 years, which gives you less time to grow the money on a tax-deferred basis,” Dave O’Brien, chair elect of the National Association of Personal Financial Advisors (NAPFA), told ABC News.
Another change that American workers should be wary of, according to consumer advocates, is adding annuities — complex financial tools offered by insurance companies — to 401(k) plans.
Annuities have seen a boom in sales since last June, when the Trump Administration rolled back Obama-era regulations that required financial advisers to put their customers’ interests ahead of their own.
“There will come a time where we will point back to this as the start of a trend toward high-cost annuities being offered in 401(k) plans to the detriment of retirement savers,” Barbara Roper, the director of investor protection at the Consumer Federation of America, told The New York Times.
The new law would let employers off the hook for the outcomes of the annuities, which guarantee some future income but usually charge high fees.
“Putting an annuity in your 401(k) plan adds complexity and cost that small employers and employees do not need. Employees can still buy an annuity when they retire. You don’t need an act to allow people to buy something you’re allowed to buy outside of your retirement plan,” O’Brien said.
Annuities are complex financial tools to which workers can contribute over years, and then get regular payouts in retirement. However, experts say that except for the most sophisticated investors, they are hard to understand.
Annuities are often pitched as similar to a pension because of the regular payouts. But O’Brien calls that a false equivalency.
“People may claim it’s like a pension, it really isn’t. A pension is the employer’s money going in for you. This is the employee’s money going in for expenses,” O’Brien said. “A pension is a highly regulated, retirement benefit that the employer funds. An annuity is a really complicated, expensive insurance product that the employee would buy.”
Annuities are often marketed as tax-deferred savings vehicles.
But, O’Brien said, “your 401(k) is already a tax-deferred vehicle. It kills me when we see an annuity in a tax-deferred IRA because you doubled up.”