There was a flurry of excitement this week on news that Congress is poised to make the “biggest changes to U.S. retirement savings in more than a decade.”
In fact, however, there was no news. The proposed changes that got everyone excited were in a bill that was introduced in March and, since then, no committee hearings have been held, much less even scheduled. The flurry of excitement can be traced to the publication of an article in The Wall Street Journal about the legislation and some of the possible changes that could get introduced.
This appears to be yet another case of journalists creating the news rather than just reporting on it. (I’m of course never guilty of that…) I nevertheless think it is worthwhile to use the occasion of this heightened attention to discuss what the possible changes could mean for your retirement financial planning.
One of the most significant changes being considered, at least according to The Wall Street Journal article, would make it easier for 401(k) participants to invest in annuities. Annuities suffer from a terrible reputation, of course, owing to years to being oversold, often charging exorbitant fees, and being so complex that they’re hard to analyze or compare. One consequence is that annuities do not play nearly as widespread a role in this country’s retirement savings as most academic experts recommend.
That is one of the motivations for this pending legislation. But would the suggested changes make any difference? How should you react to them?
For answers, I turned to Jamie Hopkins, Professor of Retirement at the American College of Financial Services in Bryn Mawr, Penn. In an interview, Hopkins argued that the annuity-related changes that have so far been proposed will have relatively little impact, even if they are passed. To truly live up to the hype about how much the proposed changes would mean for retirement savings, the legislation would have to go a lot further than where it stands now.
One of the proposed changes, for example, is to require 401(k) sponsors to report to participants how much monthly annuity income their savings would support. That in theory would be a great benefit, since it would enable participants to be much better informed as they plan for their retirement.
But, Hopkins pointed out, the vast majority of 401(k) sponsors already report this number. It’s only a small minority of sponsors who are holdouts and who do not report. “This proposal has been around for a number of years,” he said, and “most of the 401(k) marketplace moved there already. The only real impact of this legislative change at this point will be to simply bring up the bottom.”
Hopkins added that, in any case, there is a big problem with reporting this number: There is no agreement on how it should be calculated. Different assumptions can lead to wildly different conclusions, needless to say. The calculations and projections currently reported by many of the current 401(k) sponsors are “almost useless,” he said, because of “bad assumptions.”
Another annuity-related change in the proposed legislation would provide additional legal protections to 401(k) sponsors who offer an annuity as one of their distribution options when a participant cashes in. The motivation for this change is that some sponsors may currently be reticent to provide such an option out of fear of legal liability if something goes wrong.
Hopkins allowed that “this would appear to have some positive benefits,” but quickly added he isn’t holding his breath that it will make much of a difference. The real issue is the “huge negative perception around annuities” which undoubtedly will dissuade many participants from even considering annuities—and that negative perception “won’t be overcome by a simple liability protection.”
Of course, the pending legislation could easily be modified to include more annuity-related changes than the two discussed here. If you feel so inclined, which changes should you recommend when writing your Senator or congress person?
Hopkins suggestion is the creation of a government-sponsored and administered “annuity warehouse.” Annuities that meet certain standards would appear in this warehouse, allowing participants to readily compare various options. This would “allow any plan participant to review the annuity options as they leave their 401(k) and instead of rolling money out or taking an in-plan distribution option, they could purchase an annuity option simply by rolling their money into the warehouse. This would essentially allow all plan participants access to an annuity option without placing the burden on the employer.”
In any case, stay tuned. I’d guess that with a full agenda for the remainder of this congressional session, this legislation is unlikely to see the light of day. But you never know.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.
