Commentary
Four reasons Americans should consider an annuity rollover – and why advisors should advise it:
1. Control
Whether you have a defined contribution plan like a 401(k) or 403(b) or a defined benefit plan or pension, a key reason why you may want to roll your money is so that you have control over your savings decisions.
According to the Bureau of Labor Statistics, the average worker currently holds 10 different jobs before age 40 and Forrester Research predicts that today's youngest workers will hold 12 to 15 jobs in their lifetime. When you consider that the number of different employer plans you may utilize the number of accounts to manage and track can be mind-numbing.
Plus, after you leave a job, it can be very difficult to get help from your previous employer! You won’t be there the one day a year the plan sponsor’s financial advisor is visiting, or you don’t know the person in human resources you’re supposed to talk to. Maybe you don’t even want to contact your ex-employer. Rolling your savings over to an annuity IRA lets you take back control.
Besides, your employer-sponsored plan may not be doing so well and there is nothing you can do about it. You may have few alternative choices in the investment options your employer has selected or you have no control over how your pension is performing. And it may not be performing so well.
Pensions & Investments reported in January that the average return for 219 pension funds in 2015 was negative .08 percent. On Monday, Reuters reported that the California Public Employees’ Retirement System, the country’s largest public pension fund, announced its fiscal 2016 return was “likely to be flat.”
Take back control of your savings plan with an IRA annuity.
2. Consolidation
Having your retirement savings in one individually-owned IRA annuity makes doing taxes easier. And when required minimum distributions (RMD) begin, calculations are easier. The IRS lets you take your required distribution from one account, but you must calculate the required amount across all accounts.
That’s not always easy to do. The RMDs amount is not always the easiest to calculate and making the calculations for each account separately can produce errors that could possibly have tax consequences. Most companies, if not all, will calculate your RMD for you and distribute the funds according to IRS timing requirements.
Consolidation of your employer-sponsored plans will simplify your life and ease your stress as the IRS-penalty for not taking the correct RMD is 50 percent of the amount that was to be taken.
3. Costs
According to FiduciaryNews.com’s Joe Valletta, author of The 401k Averages Book, the range of fees in a 401(k) from 0.87 percent for larger plans to 1.56 percent for smaller plans. As we reported previously, it is unclear if these numbers include the fees charged for individual investment choices made by the participant. Since those are highly personal and variable, we didn’t think so and still don’t.
The Center for American Progress estimates that a typical worker -- earning the median income and paying the average 401(k) fees over their lifetime -- will be assessed a total of $138,336 in fees.
And the costs explode for higher-income employees, who, assuming a starting salary of $75,000 at age 25, are projected to pay an estimated $340,147 over their lifetimes, thanks to the fee structure of the average 401(k) plan.
As all annuity advisors know, that fixed annuities do not charge any fees other than those for add-on benefits like long-term care or income riders.
4. Certainty
Last, but by no means least, when employer accounts are rolled into an IRA annuity, you are protecting the savings from market losses.
Every news program reporting on the market turmoil created like last week following Great Britain’s decision to exit from the European Union, infamously titled Brexit, emphasized the impact this situation has on the 401(k)s owned by American workers.
On Friday, June 24, CNBC reported that the S&P 500 was down 3.1 percent, while the FTSE 250 has dropped by 6.4 percent.
Bankrate.com startled readers with their Brexit headline warning: Don't check your 401(k)! And reporter Jill Cornfield referenced a friend in the financial services industry telling her he “kept seeing people checking their accounts on their phones. Then, he would watch them freak out.”
One report projected that Americans “are no doubt wondering how they can protect their investment accounts from further losses.” If the money is available at a previous employer or through an “in-service” employer-sponsored account, an IRA annuity will help you sleep well at night with the certainty that you won’t have to worry about market losses again.
It is likely the market will continue a bumpy ride of ups and downs into the foreseeable future. Many of today’s workers are decades away from retirement and have plenty of time to recover from losses they are seeing right now.
But for people who expect to retire in the next five years or so may need to take action. The Washington Post offered this advice from Christian Weller, a retirement income expert and professor of public policy at the University of Massachusetts: “now may be a good time to look at their savings, insurance and other parts of their retirement plan to make sure they’re prepared to deal with the volatility.”
Rolling your account today, when you’ve just taken a hit may not always be the best idea – buy low, sell high, right? However, if you are nearing retirement or even in retirement, rolling to an IRA annuity to protect your savings from further loss may be your best option.
But, also consider your emotional stress and what that might do to you and your savings. Emotions were responsible for 43 percent of investment underperformance, sais Jack Marrion, president of The Advantage Compendium, reporting on the 2016 DALBAR Quantitative Analysis of Investor Behaviour.
Marrion mentions how annuities protect investors from their emotions, specifically with fixed indexed annuities: “The annuity buyer is not tempted to pull out when the index is down because that is when the index annuity proves its worth. The ability to reset the starting point of the index[ed] calculation gives the annuity owner a fresh start.”
Rolling your employer-sponsored savings into an IRA annuity provides more control and easier management through consolidation of multiple account. Also, an IRA annuity does not have the debilitating fees that can annihilate your retirement savings.
And, IRA annuities can protect your savings from market losses and protect you from YOU. With an IRA annuity you place the money in and let it sit and grow. So SIT IT and FORGET IT with an IRA annuity.
Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.
Contact Kim at kobrien@innfeedback.com.
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