401(k) plans may soon consider annuities as a default investment option.

• A separate retirement-related measure, which is expected to be introduced later this month, contains a bipartisan bill.
• Several bills on Capitol Hill seek to expand upon the 2019 Secure Act.
• Here are the details.

A plan is being considered by lawmakers to make annuities a standard investment option in 401(k) plans.

Supporters of the provision in a House bill argue that up to 50% of a participant's contribution could be put into an annuity, providing a guaranteed source of income for retirement.

The Insured Retirement Institute, which represents the annuity industry, advocates for including the concept of lifetime income as a part of a default investment option, not the entire amount, but a portion, said Dan Zielinski, spokesperson for the organization.

To ease anxiety about running out of money in retirement, this option could provide a steady income stream while preserving the remaining portion of investment savings, as stated by Zielinski.

To manage a significant risk during retirement, it is crucial to plan ahead. In 2021, families with children may be eligible for an $8,000 tax credit to help offset child care costs. Homebuyers should anticipate and budget for unexpected repair expenses in the first year of ownership.

The Lifetime Income for Employees Act, a bipartisan bill, is included in a draft version of another retirement-related bill that will be formally introduced later this month. This measure is one of several pending in Congress that aims to enhance retirement security, building on the Secure Act, which was enacted in 2019 and aimed to increase the number of savers and improve retirement security.

The likelihood of the annuities proposal being included in a broader retirement bill this year is uncertain.

An annuities are contracts with providers, typically insurance companies, where you pay money in exchange for guaranteed regular payments over many years or decades. The cost and guarantees of annuities can vary widely.

The bill proposes to allow annuities to be included as a default investment option in 401(k) plans, accounting for up to half of the default investment. If a participant does not select a specific investment, their contributions will be automatically invested in an annuity.

If a portion of their 401(k) contributions are defaulted to an annuity, participants will have six months to opt out and receive notification of their right to choose a different investment.

The specifics of the annuity contract and its surrender charges could make it harder to get out beyond the initial window, according to Zielinski.

The fees associated with annuity contracts can be quite high, particularly during the initial years of the contract. For instance, an eight-year surrender period may incur an 8% penalty in the first year, which gradually decreases to 1% by the end of the eighth year.

That lack of liquidity could be a hindrance.

Malik Lee, managing principal of Felton & Peel Wealth Management, which has offices in Atlanta and New York, said that if the plan comes to fruition, there should be flexibility so that a worker can roll over the money to a new employer's plan.

He warned that if you don't manage your plans effectively, you could end up with a lot to keep track of.

It's crucial for savers to invest money alongside an annuity, as he stated.

Lee stated that investing too much money into an annuity could pose a risk from a buying-power perspective, as most annuities lack annual cost-of-living adjustments.

Although annuities are not typically included as a default investment option in 401(k)s, they are available as a choice. Despite the Secure Act's aim to reduce companies' liability concerns if the annuity provider fails or does not fulfill its obligations, uptake by plan sponsors has been slow.