A Fix Everyone Loves to Hate for the $4 Trillion Retirement Savings Gap

(Bloomberg Businessweek) -- Saving for retirement is hard enough, but another difficult challenge is making sure the money lasts. Invest your nest egg conservatively, and you might not be able to stretch the money out, especially if you live longer than you expect. Putting more in the stock market could keep the pile growing—but once you stop adding money, a streak of bad returns could decimate your stake and leave you little chance to recover.

For years many retirement experts have pointed to a potential solution: annuities. In its simplest form, buying an annuity involves taking part of your savings and handing it over to an insurance company. The insurer then pays out a guaranteed income for the rest of your life. In theory, putting at least part of retirement savings into an annuity can make sure you always have some income no matter what the markets do.

Even so, annuities gained a bad reputation in some circles. Many annuities are really investment products combined with insurance, with the option of creating a stream of annuity income as just one of their features. The commission-based sales model common in the insurance industry often meant that agents and financial advisers had incentives to push higher-cost annuities. Those products sometimes locked up the money for more than a decade before an investor could withdraw funds without paying a hefty penalty. And complex rules governing how that money was invested—explained in filings running 100 pages or more—left many scratching their heads in confusion.

The insurance industry says it’s gotten the message. It was prodded in part by Obama-era rules from the U.S. Department of Labor that took aim at conflicts of interest in investment advice. In 2016 and 2017, sales of annuities dropped as advisers faced uncertainty about the impact of the new regulations. Insurers rushed to create a flood of products redesigned to win back financial advisers and a skeptical public. Distributors began culling the number of annuities they offered, and insurers promoted products that paid advisers through fees rather than commissions, sidestepping some conflict of interest worries.

Pathway Financial Advisors, a fee-based firm with offices in Vermont and Georgia, steered clear of annuities for years. “Historically, insurance products have been sold and not bought,” says founder Scott Beaudin. Last year he added an annuity to a client’s portfolio for the first time, largely because the products have become “simpler.”

But the Labor Department’s conflict of interest rules are in trouble. In March a U.S. appeals court struck them down, saying they were outside the department’s authority and “unreasonable”; the Trump administration hasn’t appealed. And some think the improvements aren’t enough to make annuities more appealing. “From my perspective, there haven’t been any real dramatic changes in product design,” says Ken Nuss, chief executive officer of AnnuityAdvantage, an online marketplace. Andrew Komarow, co-founder of Talcott Financial Group in Farmington, Conn., isn’t convinced either. He says the main difference between the latest products and those insurers sold before is that the new ones are being aggressively marketed to fee-based advisers.

The issue of retirement savings has become more pressing as a swell of baby boomers ages out of the workforce. According to a report from the World Economic Forum, using data from the Employee Benefit Research Institute, total individual retirement savings in the U.S. are more than $4 trillion short of what’s needed. Boomers are living longer than previous generations, and many worry they’ll run out of money, according to Ted Goldman, senior pension fellow at the American Academy of Actuaries. “They start hoarding, and they’re afraid to spend anything,” he says.

“Annuities and protection products actually have an opportunity to solve that,” says Jamie Price, CEO of the Advisor Group, a network of independent advisers. “The problem is some of them have high costs, and I think that they need to rethink how they build their products and services.”

Investors eventually may be able to buy annuities without going through advisers or agents. Employer-based 401(k) retirement plans could become the gateway to insurance against outliving one’s savings. Under the Obama administration, regulators made it easier for plans to make simple annuities an option. They also changed some regulations to encourage what are known as longevity annuities, which don’t start payments until you’re about 80 years old. The idea is to provide protection when you’re most vulnerable, while letting your own savings handle the early years of retirement. Because the coverage starts later, longevity annuities can offer more generous payments for a smaller amount of money. Some research has found that putting as little as 10 percent of a 401(k) balance at retirement into a longevity annuity could significantly supplement Social Security and support an elderly person’s income.

But there’s still an obstacle to annuities in 401(k)s. Many employers worry they’ll get sued if the insurer they chose to offer an annuity gets in trouble 30 years down the line. A bipartisan bill winding its way through Congress seeks to give employers some legal protection. Whatever the outcome of the regulatory battles around annuities, Price has one piece of advice for the industry. “Stop building the next whiz-bang product,” he says. Insurers should aim to “think about finding better outcomes for clients.”

To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net, Michael Tsang

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