Proposed 401(k) Rule Could Transform Retirement Income Options, But Concerns Remain

A bill before Congress could make it easier for 401(k) savers to shift money into annuities while also giving workers clearer information about distribution choices and tax consequences.

The bipartisan Retirement Simplification and Clarity Act (H.R. 6324) may reshape retirement income planning in a major way, though it also raises some concerns.

Here is a look at the legislation and what it could mean for retirement savings and income.

Where the Bill Stands

H.R. 6324 is a revised version of an earlier proposal that was reintroduced in the U.S. House. Its cosponsors include U.S. Rep. Jimmy Panetta (D-CA) and U.S. Rep. Darin LaHood (R-IL).

The measure was immediately sent to the House Ways and Means Committee, where it remains. There is little indication of when, or whether, it will move forward in the legislative process.

Congress.gov currently lists only two actions on the bill: its introduction and its referral to committee.

What the Bill Would Change

The central provision would allow employees age 50 and older to roll over some or all of their 401(k) savings into a qualified annuity while still employed, according to CNBC. That would mark a significant departure from current rules.

“Right now, most people can’t move money [from their 401(k)] into an annuity while they are still enrolled,” David Chavern, president and CEO of the American Council of Life Insurers, told CNBC. “This significantly limits their options as they start to turn their accumulated savings into needed income.”

An annuity is an insurance product that provides payments in a fixed stream. Its purpose is to create dependable income in retirement, something that many other savings vehicles cannot guarantee. A 401(k) or IRA, for instance, runs out once the money is gone. With certain annuities, payments continue for life.

The bill would also require the IRS to update the official document given to workers when they leave an employer and request a 401(k) distribution, CNBC reported.

Both changes have broad support within the insurance sector.

“The new notice would use ‘clear, straightforward language’ to explain various options for 401(k) distributions and rollovers along with their tax implications,” the National Association of Insurance and Financial Advisors said in a statement supporting the bill.

Possible Drawbacks

Some critics worry the proposal could make retirees too reliant on the financial strength of a single insurer, said Chad Cummings, an attorney and certified public accountant at Cummings & Cummings Law.

“I remind my clients that an annuity is not FDIC-insured. It is a contract with a private insurance company,” Cummings told MoneyLion. “State guaranty association coverage caps at $250,000 in most states, and some cap at $100,000. If your carrier fails and your annuity exceeds that cap, you absorb the loss. Therefore, we can't really use the word ‘guarantee’ in the literal sense, at least not without an asterisk. That's the key point.”

He also said moving 401(k) money into an annuity at age 50 would mean giving up years of potential stock-market growth, which could amount to hundreds of thousands of dollars for some middle-class savers.

“For example, a 50-year-old who moves $300,000 into a fixed annuity yielding 4% forfeits the historical 7%-to-10% annual return of a diversified equity portfolio,” Cummings said. “I tell clients: The annuity company is not offering you a gift or doing you a favor. It is buying your longevity risk at a steep discount and investing your money in the same markets you just exited.”