(MarketWatch) The SECURE Act (Setting Every Community Up for Retirement Enhancement)—a bill that passed the House of Representatives earlier this year by a sweeping margin of 417 yeas to 3 nays—is poised for passage in the Senate when it comes up for a vote. The legislation’s extraordinary bipartisan support is attributable to its essential goal of improving retirement security for millions of American workers. A key provision in the bill gives employees improved access to protected lifetime income from annuities within their workplace retirement savings plan.
Among other things, the dramatic decline in company pensions over the past 30 years, replaced by defined-contribution plans such as 401(k)s, has led to millions of Americans without a source of protected lifetime income. Protected lifetime income is retirement income that is guaranteed and cannot be outlived—a universal need if ever there were one. Running out of money is the single greatest financial concern of clients planning for retirement, according to a 2018 study by the American Institute of CPAs. Further, a 2019 study by the World Economic Forum shows that 65 year-olds in the U.S. could outlive their retirement savings within nine years.
With Americans living longer than ever before, this has created a bona fide retirement income crisis in America in which 64% of U.S. households stand a chance of running out of money in retirement. That translates to 80 million households lacking a source of protected monthly income other than Social Security, according to the 2019 Protected Lifetime Income Index study, a census-balanced survey of over 3,000 U.S. adults by the Alliance for Lifetime Income. How scary is that?
In order to address the need for retirement income, the SECURE Act has a provision that would improve employee access to annuities in their employer-sponsored retirement plans. Unfortunately, pensions—the main source of protected lifetime income for employees in past generations—have virtually disappeared. And those pension plans that still exist are under increasing pressure and vulnerable to cutbacks. One example of this was General Electric’s recent announcement that it was freezing its pension plan for about 20,000 U.S. workers, while offering pension buyouts to 100,000 former employees.
Like pensions, annuities have provided retirement security to millions of retired Americans for generations, especially since the entire burden of saving for retirement has shifted almost completely to employees. In fact, annuities are one of the oldest, most-trusted retirement products in the marketplace, giving millions of retirees peace of mind knowing they’ll always be able to count on an income as long as they live
By including annuities as an option in 401(k) and other employer-sponsored plans, companies are helping employees protect a portion of their portfolios with guaranteed lifetime income, while continuing to accumulate and grow savings through other parts of their plan. Annuities are the only asset class in a retirement portfolio that can provide protected lifetime income, after all.
Fundamentally, annuities help protect consumers from multiple risks in retirement. Two of the most important are longevity risk and sequence risk. Today, Americans are projected to live another 20, 30 or more years in retirement than preceding generations. Though none of us can truly know how long our retirement will last, we must plan to have enough money to last for the rest of our lives. Protected lifetime income from an annuity can help solve that problem by guaranteeing regular and reliable lifetime income.
Second, annuities can help protect employees from market volatility risk, especially the risk that retirement savings values will decline in the period immediately before an individual chooses to retire—a common problem known as sequence of returns risk. Market downturns can have lasting and damaging effects on retirement income for years, even decades.
At a time when the lack of protected retirement income has become a national crisis, annuities have never been more important to the future retirement security of millions of American workers.
Anyone who doubts that there is a looming retirement income crisis should know that one of the first signs of it may already be here. A major longitudinal study published last year—The Graying of U.S. Bankruptcy—showed the number of Americans age 65 years and older who have filed for bankruptcy has doubled since 1991, now the largest share of any age group. Since employer-sponsored retirement plans have become the primary way Americans save for retirement, we must give employees the choice and opportunity to select protected lifetime income from an annuity as part of their retirement savings. Thankfully, the SECURE Act is an important step in the right direction to achieving that, and will hopefully help meet the retirement income needs of millions of Americans.
