Older Workers Could Use 401(k) Funds to Buy Annuities Under Proposed Bill. But Should They?

Core Insights - A proposed bill, the Retirement Simplification and Clarity Act, aims to allow workers aged 50 and older to invest part of their 401(k) funds into annuities, while also simplifying rollover information for those leaving a job [1][2][10] Group 1: Legislative Changes - The bipartisan bill is designed to help Americans plan for retirement by simplifying processes and providing more flexibility [2] - The bill has been referred to the Ways and Means Committee, but no further action has been taken yet [2] Group 2: Impact on Retirement Savings - Currently, workers can perform in-service rollovers to transfer 401(k) funds to another retirement account tax-free while still employed [3] - The new bill would allow plans to offer workers aged 50 and older the option to roll over their 401(k) funds into an individual retirement annuity, subject to plan sponsor approval [4][10] Group 3: Annuities Overview - Annuities provide periodic payments to retirees and can be beneficial for those seeking guaranteed income, but they can also be complex and costly [6][10] - Cash invested in annuities is illiquid and may incur withdrawal penalties, making them less suitable for younger individuals or those needing quick access to funds [7] Group 4: Expert Opinions on Annuities - Financial advisors suggest that annuities can help individuals who are risk-averse and may struggle with emotional decision-making in their portfolios [8] - Some experts recommend allocating a portion of a portfolio, approximately one-third, to annuities while investing the remainder in stocks, as annuities can create a reliable income stream [9] Group 5: Rollover Information Challenges - The bill aims to simplify the 401(k) rollover information provided to employees upon leaving a job, as many workers struggle to understand their distribution options [11][12] - A 2024 GAO report indicated that 80% of eligible 401(k) participants were unaware of their retirement account distribution options, highlighting a significant knowledge gap [13]