Annuities may soon become a default investing option in 401(k) programmes.

Annuities may soon become a default investing option in 401(k) programmes.

A draught version of a separate retirement-related bill anticipated to be introduced later this month includes the bipartisan bill.

It's one of a number of bills on Capitol Hill that try to build on the Secure Act of 2019.

The following are the specifics.

A proposal to allow annuities to be included as a "default" investment choice in 401(k) plans is being considered by lawmakers.

Under some situations, up to 50% of a participant's contribution might be put into an annuity, according to a measure in the House. The goal, according to supporters of the provision, is to provide workers with a source of guaranteed income drawn from their savings when they retire.

"What we're recommending is bringing the concept of lifelong income as at least a piece of a [default investment option]—not the full amount, but a portion," Dan Zielinski, a spokesperson for the Insured Retirement Institute, which represents the annuity industry, said.

People worry about running out of money in retirement, so this would be a way to reduce that worry and provide a source of income while keeping the rest of their investment funds, according to Zielinski.

The Lifetime Income for Employees Act, a bipartisan bill, is also contained in a draught version of another retirement-related bill that will be formally filed later this month. It's one of a handful of bills in Congress that try to build on the Secure Act, which was passed in 2019 with the goal of increasing the number of savers and improving retirement security.

It's unclear whether the idea to make annuities the default choice would be included in any larger retirement bill that proponents expect to see this year.

Annuities can be very different in terms of cost and, more importantly, guarantees. They all, however, entail entering into a contract with a provider (usually an insurance company) in which you hand up your money in exchange for the promise of receiving regular payments for a long period of time (or decades).

As worded, the bill would allow annuities to be included as a default investment in 401(k) programmes. If you donate to your plan but haven't decided what to invest in, that's where your money goes (target-date funds, for example, are a common default investment). An annuity might account for up to half of the default option under this measure.

If a portion of a 401(k) participant's contributions are defaulted to the annuity, the law offers them six months to opt out. They would be informed of their right to choose a different investment shortly after being enrolled in the annuity.

Getting out after that initial window, however, may be more difficult: According to Zielinski, it would rely on the parameters of the annuity contract and its so-called surrender charges.

In general, those costs can be quite high, particularly in the early years of an annuity contract. For example, an eight-year surrender term might start with an 8% fee in the first year and steadily reduce until it reaches 1% in the eighth year.

It's possible that a lack of liquidity will be a stumbling block.

If this happens, there should be flexibility so that employees can roll their money over to a new employer's plan, according to certified financial planner Malik Lee, managing principal of Felton & Peel Wealth Management in Atlanta and New York.

"If you don't, you'll wind up with a lot of plans to keep track of," he warned.

It's also critical, he added, for savers to invest alongside an annuity.

"Putting too much money into an annuity could be a danger in terms of purchasing power," Lee explained, "since most annuities don't have annual cost-of-living adjustments."

Although annuities are not permitted to be the default investment in 401(k)s, they are permitted to be included in the investment lineup as an option. Despite the Secure Act's goal of removing employers' fear of legal liability if the annuity provider fails or otherwise fails to meet its obligations, plan sponsors have been slow to adopt it.