Do You Need An Annuity For Retirement?

The even-more-ridiculously-acronymed-than-usual SECURE Act (that's Setting Every Community Up for Retirement Enhancement) has made it through the House of Representatives, and could make it through the Senate soon (though a couple of senators are holding it up at the moment). The act proposes a number of things, but one big one is that it will likely allow annuities to be offered in retirement plans--such as 401(k)s--more easily.

Plan administrators have mostly been shy to offer annuities for fear of being held accountable should the annuity's issuing company fail. The new legislation relaxes some of the fiduciary responsibilities, making it potentially more palatable for administrators.

Whether the bill makes it through in any form, we thought its existence would be a good excuse for taking a closer look at annuities, and talking about whether they're needed in a retirement plan or not.

Better Late Than Never, or Better Never Than Late?

Why now, you ask? Others might ask, why not before now? That's because by some measures, defined contribution plans (such as 401(k) plans) have not lived up to expectations.

Some of this is investors' faults, but some is not. If you're not saving enough--and of course we know most people are not--that's largely on you. But there is a big piece of 401(k) plans that is largely out of participants' control. If the investment choices are bad (specifically, if the fees are high), there's normally nothing you can do about it. And if you don't know much about investing, you may feel overwhelmed or bewildered by the choices. Nobody expects you to fix your car engine (unless you're a trained mechanic); why do we expect you should be able to plan your retirement?

Enter annuities. The best of them are easy to understand, even by financial novices: Give us your money, and we'll give you this much money per month until you die. Sounds simple.

But simpler isn't always better (though it usually is in investing). For one, annuities have fees as well, and they can be stupidly high. As with mutual funds, you may not know what constitutes a high fee versus a fair fee for the services you're receiving. Also, if you change your mind and want the money back, you'll be paying a surrender charge.

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