Can This New Bill Help Workers Buy Annuities? A Common-Sense Look at the Trade-Offs

The core idea behind the bipartisan Retirement Simplification and Clarity Act is straightforward: it would let workers aged 50 and older roll over money from their 401(k) into a qualified annuity while still employed. Right now, that option is generally off-limits. Most people can only move their savings into an annuity after they leave their job, which often means they're already deep into retirement planning and facing a tough decision about stretching their nest egg.

The intended benefit is clear. For the many savers anxious about outliving their money, this bill aims to provide a simpler path to a guaranteed monthly paycheck. Supporters, including the insurance industry group NAIFA, argue it enhances retirement security by giving people more control over converting savings into income earlier. As one advocate put it, this move "significantly limits their options" for securing that income stream.

The fear of running out of money is real. A recent survey found that 66% of savers worry they'll run out of money in retirement, and 93% want a guaranteed income in their golden years. Annuities are a direct response to that anxiety, offering a contract where you hand over a lump sum for regular payments for life.

So the promise is appealing: more choice, more security. But it sets up a classic trade-off. By pulling money out of a 401(k) while you're still working, you're taking it out of a vehicle where it can continue to grow. The central question for any worker is whether locking in a guaranteed paycheck now is worth the potential future growth they might sacrifice.

The Real-World Trade-Offs: Growth vs. Guaranteed Paycheck

The promise of a guaranteed paycheck is powerful, but it comes with tangible costs that a common-sense financial check reveals. The first and most straightforward trade-off is growth. When you pull money out of your 401(k) while you're still working, you're taking it out of a vehicle where it can continue to compound. As one financial advisor notes, workers may benefit from leaving their money in their 401(k), where it can continue growing. That future growth is the price of admission for locking in today's income. For someone in their 50s or 60s, that could mean tens of thousands of dollars in lost potential returns over the next decade or more.

Then there's the hidden tax on that guarantee: fees. Annuities are notorious for layered charges that can quietly erode your savings. These "wrap fees" cover administrative costs, insurance risk, and optional riders, and they are often buried in expense ratios or insurance contracts. The math is brutal. As one analysis points out, even a small extra fee can cost a participant tens or even hundreds of thousands of dollars over a lifetime. For a product marketed as a simple solution, the cost structure is anything but simple.

Finally, there's the risk of loss. Unlike a 401(k), where your beneficiaries inherit the full balance if you die early, many annuities don't pass the remaining principal to heirs. If you die before you've received back the full amount you paid in, the insurance company may keep the difference. This is a fundamental shift in risk that needs a clear smell test: are you trading the security of your savings for a guaranteed paycheck that might not benefit your family?

The bottom line is that this bill opens a door to a powerful financial tool, but it also forces a direct trade-off between future growth, hidden costs, and the security of your principal. For many, the guaranteed paycheck is worth it. For others, the price of admission is simply too high.

The Bigger Picture: Are Annuities a Good Fit for 401(k)s?

Stepping back, the trend is clear. Annuities are no longer a fringe product; they're becoming a standard feature in many 401(k) plans, thanks to the SECURE Acts. These laws made it easier and safer for employers to offer them, shifting liability concerns and making annuities more portable. The result is a growing menu of options, with nearly 70% of workers with significant assets saying they'd consider one if offered.

But here's the common-sense reality check: adding an annuity to your 401(k) often means adding layers of fees. The product itself comes with costs, and the fund provider managing it may charge an extra layer. This creates a double fee drag that can quietly eat into your returns over decades. For a tool meant to provide security, the cost structure can be a real headwind.

There's also a better-known, simpler rule from SECURE 2.0 that deserves mention. It allows income from a qualified annuity to cover required minimum distributions (RMDs) for other retirement accounts. In theory, this means more money can stay invested longer, continuing to grow. It's a clever workaround, but it adds another layer of complexity to an already intricate financial picture.

So, for the average worker, is this the right fit? The answer often comes down to simplicity and cost. Traditional funds like target-date funds are the backbone of most 401(k)s for a reason. They offer broad diversification, lower fees, and a straightforward path to retirement. For someone not yet at the point of needing a guaranteed paycheck, the hassle and expense of an annuity may not be worth it.

The bottom line is that annuities have a place, especially for those who have already saved enough and are deeply worried about outliving their money. But for the majority, the path of least resistance-staying invested in a low-cost, diversified portfolio-remains the most practical choice. It's the financial equivalent of keeping your car in good repair rather than buying a new one just to get to the same destination.

What to Watch: Catalysts and Risks

For this bill to move from a promising idea to a meaningful tool, several real-world factors will need to align. The first is its political fate. The bill has been reintroduced, but it faces a crowded legislative agenda. Its progress through the House Committee on Education and the Workforce will be a key early signal. More importantly, any changes to fee disclosure requirements could make or break its appeal. As the bill's supporters note, it aims to provide clear, straightforward language to explain options. If that clarity extends to the often-murky fees of annuities, it could build trust. If not, it risks adding another layer of confusion.

The biggest risk is that this complex financial move will be pushed on workers who don't fully understand the trade-offs. The bill's promise of a guaranteed paycheck is powerful, but the math of growth sacrificed, fees eroded, and principal at risk is not simple. In practice, this could mean well-intentioned workers making choices that don't actually improve their long-term security. The recent Supreme Court decision in Cunningham v. Cornell University has already heightened concerns about fiduciary liability, which could make plan sponsors and advisors extra cautious. If the guidance is unclear, they may simply avoid offering these options altogether, leaving the bill as a niche product.

The real test, then, is execution. Will plan sponsors and financial advisors step up to offer clear, low-cost annuity options that actually improve outcomes? The trend of annuities in 401(k)s is growing, thanks to the SECURE Acts, but that's often driven by provider incentives, not always by the simplest or cheapest solution for the worker. For this bill to work, the product needs to be straightforward enough that a common-sense financial check passes. If it's just another layer of complexity with hidden costs, it won't help the average saver. The bottom line is that good intentions need good design to translate into better retirement outcomes.