By Beth Pinsker
NEW YORK (Reuters) - The days of guaranteed pensions from work are long gone, but can annuities make up the difference for millennials?
Congress is on the cusp of passing retirement reform legislation that will open 401(k) plans to annuity products which guarantee lifetime income, alongside the more typical offerings of mutual funds, target-date funds and bonds.
Yet most people do not consider annuities until they are nearing retirement. At that point, they might take $100,000 or so from the sale of a house or a business and plunk some of it down on an annuity policy that will either delay payments for a few years or start immediately, getting something like $750 a month for life once they turn 65.
While it is rare for millennials to be interested in annuities, certified financial planner Ashley Folkes, who is based in Phoenix, Arizona, does have some clients who ask about lifetime income.
"There are some that are really against risk," Folkes said. "If they can’t sleep at night, what can you do?"
For those clients, Folkes said there are annuities products that will give you more return than just a money market fund. He does not stray into any of the more risky and fee-laden variable annuities, because if they can deal with risk, he steers them into stocks and bonds.
Shane Morrow, a certified financial adviser based in Austin, Texas, uses annuities with some clients in their 30s as a portion of their asset allocation.
Morrow's clients invest in these products outside of their workplace retirement plans, which means they keep control of them even if they change jobs or move. The portability of the new 401(k) annuities that Congress will now permit is not clear yet.
"Those are very real questions - the mobility of work is significant," Morrow said.
QUESTIONS, NO ANSWERS
Also unclear in the bills moving through Congress is what type of annuities will be offered, what fees will be charged, how taxes will be assessed and what the limits will be.
"Are they going to be reversible, so you can change your mind?" asked Glenn Daily, a fee-only insurance consultant based in New York, something that is typically not possible today without huge surrender fees.
Daily also questioned the administrative costs, which can be considerable, especially considering the potential return.
"I’m really skeptical that giving up investment flexibility at a young age is smart," Daily said. "You really have to be well compensated for giving up flexibility."
How much could millennials get out of annuities in a 401(k) while investing small amounts per payroll period? Maybe not too much, because they would still want to stick mostly with stocks - the recommended split between stocks and fixed income is 60-40 or 70-30.
It would take a 25-year-old making $50,000 and contributing 6% a long time to save anywhere close to $100,000 toward an annuity, considering they might just be putting in $50 a pop toward it.
Doug Boneparth, a certified financial planner whose clientele at his company, Bone Fide Wealth in New York, is heavily millennial, wants to know who will educate workers about these choices.
"It's a blatant example of how the general public's lack of understanding of personal finance could do some harm as you start marketing complex products inside 401(k)s," Boneparth said.
The better way to save more for retirement is to max out all your tax-advantaged plans with a disciplined and diversified approach. Annuities should be off the table until you do all of that, Boneparth said.
Then, if you still have extra savings, there is a whole open market to choose from.
"Why do you need your employer plan to decide what annuity to pick?" Boneparth said.
