Senate Committee Examines Retirement Readiness Issues

By Arthur D. Postal
InsuranceNewsNet

WASHINGTON – “Annuities, despite their reputation, are not all bad,” said NBC’s Today Show financial editor Jean Chatzky at a Senate committee hearing.

During a hearing by the Senate Special Committee on Aging, Chatzky urged greater investment in longevity annuities by Americans who are concerned about preparing for a retirement that may extend for decades.

Chatzky was among those who testified at a hearing on “Bridging the Gap: How Prepared Are Americans for Retirement?”

Asked by Sen. Bob Casey, D-Pa., how Americans should best deal with the longevity dilemma, Chatzky cited qualified longevity annuity contracts (QLACs) as an “important tool that can be used to essentially protect you if you live to age 85 or beyond.”

However, Chatzky said, “Convincing people they should invest in these is hard, because you are essentially betting against yourself.”  That is, if you die at a relatively young age you get nothing in return for making the payments.

“Having worked for personal finance magazines for 15 years, we spend so much time talking to people about how they need to accumulate, accumulate, accumulate, and not nearly enough about talking to people about how they take what they have accumulated and make it last,” Chatzky said.

“That needs to be the next phase of the conversation, and the financial institutions are way ahead of us, they are already rolling out a lot of tools, some of them good, some of them not so good,” Chatzky said. “But we need to get with the program and focus on that conversation.”

She explained that, “We need transparency when it comes to the tools flooding the market that purport to be able to make your money last, and annuities, despite their reputation, are not all bad.”

She said annuities “can be a very helpful means of using a chunk of your retirement savings to provide lifetime income.

“And the fact that QLACs are now allowed within qualified retirement plans, means we will all be seeing much more of them.”

Chatzky’s comments contrasted with those of Sen. Elizabeth Warren, D-Mass., who ripped into the financial advice industry.

“Wall Street is bleeding savers dry [by] selling lousy retirement products,” Warren said.

“Money people are investing is being eaten away by high fees, commissions, kickbacks, that Wall Street advisors and brokers get from selling lousy investment products.”

Warren explained that one of the consequences of the shift from defined benefit retirement plans to 401 (k)s was that Americans had to rely on investment advisors and brokers/dealers who she said “can legally take kickbacks from selling Americans lousy products.”

She said employers have been required to make sure when they invest pension dollars that those investments are in the best interests of the employee.

“So why is it that retirement advisors and broker/dealers who serve clients directly can sell lousy products that line their own pocket while drain savings of the client?”

Warren made a strong pitch in favor of the Department of Labor (DOL) proposal to establish a new standard of care on advisors who sell investment products into individual retirement accounts (IRAs) and 401(k)s.

In her comments, Warren acknowledged that “there are a lot of good investment advisors out there who really do put the interests of their client first and foremost.”

But she added, “There is no easy out from the problem we have created, and that is the potential conflict that exists from the advisors who take care of themselves rather than their client.”

Even though Warren said she believes that most advisors put the interests of their clients first, “Mind you, the problem is that they have to compete with the advisors who don’t do that, put their own interests first, and the only way we fix that is that we change the rule, and say that all investment advisors have to put the interests of the client first.”

Warren was supported by Alice Munnell, director of the Center for Retirement Research at Boston College.

“The real issue is that IRAs were not covered by fiduciary rules when the Employee Retirement Income Security Act of 1974(ERISA) was passed, and subject to the suitability standard, a lower standard, and there is an incentive to provide people investment advice where the fees are the highest,” Munnell said.

Munnell said she supported the efforts of the DOL to approve a fiduciary standard for broker/dealers. But, she said, there is a fiduciary standard for 401 (k)s and in looking at the array of investment  products for 401 (k)s “there are a lot of high-fee products there as well.

“I am shocked that there are so many actively-managed funds in these funds, costing these people a pile of their funds in retirement,” Munnell said.

Sen. Claire McCaskill, D-Mo., ranking minority member of the panel, said, “We live in a 401(k) world, one that requires American workers make more financial decisions and assume more risk in deciding how much money to invest and where to invest it.”

“Due to many challenges, many Americans have not been able to save the necessary funds for retirement. This retirement security crisis is very real.”

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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