The Executive Office of the President’s Council of Economic Advisers wants you to buy annuities in your retirement account. The proposal, released this month, “Supporting Retirement for American Families,” should be titled “American Families Supporting Insurance Companies.”
At the heart of the proposal is a plan to allow participants in defined-benefit pension plans, 401(k)s and other defined contribution plans, and IRAs the choice of using a portion of their money to purchase an annuity. It’s being sold as an immediate annuity. But it may open the door to the world of government-sponsored variable annuities. Forewarned is forearmed.
First off, let’s be clear: annuities are a cash cow to insurance companies. Take variable annuities as an example. They’re sold, not bought. Insurance salesmen get paid as much as 7% in commissions to unload them on as many suckers as possible. Once you own one, you pay the expense ratio fee, the mortality and expense fee, and surrender charges for up to 12 years for early withdrawals. Say you have an emergency and need your money back after a year. Once the fees are added up, you would pay perhaps 10% in fees before stock-market losses or gains are even considered.
Now as I said, in this government proposal variable annuities are not being pushed—yet. But it certainly opens the door. What is being proposed is an option to buy an immediate annuity or a longevity annuity that begins when you’re 85. The problem here is that your annuity’s payment is only as reliable as the insurance company you’re buying it from. There’s a lot of time between now and 85 for things to go wrong. In 2008, insurance companies were among the hardest hit, with some going out of business.
The main selling point is that annuities are just like pensions. You deserve to have a guaranteed monthly payment free of the market’s risks. But someone’s taking the risk, and in the end you may pay the price for bets gone bad. And the one possible benefit of annuities is that they can grow tax deferred. That’s gone under the proposed plan because the money in retirement accounts is already tax deferred.
It’s a slippery slope for unsuspecting investors.