Congress has sent retirement legislation to President Donald Trump. The Secure Act — Setting Every Community Up for Retirement Enhancement (SECURE) — has been attached to the Congressional spending bill that keeps the government running.
The bill repeals the maximum age for making contributions to traditional IRAs; raises the age for required minimum distributions in IRAs to 72; lowers barriers for employers at multiple firms who come together to offer employees a retirement plan; expands 401(k) coverage to more part-time workers; and beneficiaries of inherited IRAs must take their withdrawals over 10 years rather than their lifetime.
With one exception (I will get to that in a moment), the bill represents legislative tinkering.
The exception? The legislation clears a path for employers to offer annuities as part of their retirement plans. Employers already have the option, but only 9% do, according to the Plan Sponsor Council of America. Liability worries have held back employers. The bill offers them a “safe harbor” from liability. The annuity option will likely grow.
I have a stack of studies on my desk calling for retirement plan annuities. An annuity is a classic hedge against a long life. In return for an investment in an annuity with an insurance company, you lock in a steady income for life.
That said, retirees have largely steered clear of annuities on their own — for good reasons. Depending on the product, annuities can be complex; fees can be high. Comparison shopping isn’t easy. Creditworthiness of the provider is a genuine concern.
Annuities probably aren’t a practical choice for many 401(k) participants. Economists Felix Reichling and Kent Smetters in a research paper suggested annuitization is risky when taking health care shocks into account. Shifting purchasing power toward the end of life could mean less spending earlier when it might carry greater rewards. In an interview with NPR in 2016, Smetters said for an annuity to make sense, “You should ideally have saved up in excess of $500,000 in today’s dollars for retirement.” You could annuitize half that sum for medical expenses and leave half alone. The median combined 401(k)/IRA balance for working households nearing retirement was $135,000 in 2016.
I wish Congress had spent its legislative energy shoring up the finances of Social Security — a terrific inflation-adjusted annuity — while making benefits more generous. Both moves would make a real difference to America’s current and future retirees.
Chris Farrell is a senior economics contributor for “Marketplace” and a commentator on MPR.