In a previous column, I warned HR/benefits professionals to be wary of allowing employees who are near retirement age with inadequate 401(k) balances to be misled by the annuity industry.

Unfortunately, the annuity industry has been able to convince some members of Congress to make it easier to mislead people into believing annuities can fill empty nest eggs.

The inaccurately named Retirement Security for Life Act of 2007 would amend the Internal Revenue Code to give favorable tax treatment to annuity income. For the average retiree, the tax break could approximate $5,000. As of press time, the bill has not been passed in the House or Senate.

Under this bill, the tax savings would be totally offset by the fees and questionable sales practices of one of the most poorly regulated investment products in the country - and one whose existence is unnecessary. The misdoings by annuity salespeople include misleading investors about investment returns and how soon investors can access the money, along with generating commissions by convincing the customer to buy a new annuity.

Annuities are a "sucker's game dressed up to look like a free lunch," says John Gay, a financial planner in Frisco, Texas.

In the past, annuity sellers concentrated on the already-retired market, but now they are setting their sights on the baby boomers who are reaching retirement age and can't afford to retire. Some examples:

• In 2006, the Financial Industry Regulatory Authority issued an investor alert regarding annuity salespeople conducting workplace seminars in which they convinced employees to retire early, cash out of their 401(k)s and open an IRA that consists of a variable annuity. In one disciplinary case that FINRA prosecuted, a broker told employees, "You can make as much in retirement as you can at work," promising that he could generate annual returns of 18%.
• A similar pitch was made to Exxon Mobil workers in 1997. At least 32 of them bought the broker's line and lost most of their money. In 2006, a FINRA arbitration panel awarded these workers $22 million.
• In 2006, former New York Gov. Eliot Spitzer announced an agreement in which a big insurance company would pay $30 million in restitution to the New York State Teachers Union and agreed to cost disclosures.

The annuity industry already has been ripping off the already-retired. In the past four years alone, Florida has passed a law increasing penalties on salespeople who generate commissions by selling customers new annuities, while New Jersey has limited the time period in which sellers can impose surrender charges, and California has increased jail time on bait-and-switch sellers.

The annuitization option puts a spotlight on one of the more unfortunate features of 401(k) plans, which is that retirees can and often do take their payments as a lump sum, even before they've reached age 59 1/2, when they incur taxes and penalties. Without good advice, they might spend it foolishly, rather than banking it and taking payments that will last a lifetime.

On the other hand, for the tiny percentage of 401(k) participants who have saved enough, there are other options besides annuities for providing income streams. For example, the mutual fund industry offers "managed payout" or "target distribution" funds.

In the case of payout funds offered by Vanguard Group, shareholders can make additional contributions or withdrawals without penalty. Since these are commission-free products, churning isn't an issue.

I suspect the real reason why bad legislation gets enacted is that campaign finance reform hasn't gone far enough.

For example, the 21 members of the Senate Finance Committee who think up laws that would affect the sales of insurance products received a whopping $26.5 million from the finance/insurance/real estate (FIRE) sector in the 2007-2008 election cycle, of which $4.7 million came from the insurance industry. This data is courtesy of the Center for Responsive Politics, a nonprofit watchdog group.

It will take a while before we can replace members of Congress with lawmakers who will vow to represent their citizens, rather than the source of their contributions. In the meantime, let's hope America's HR/benefits leaders continue to look out for the best interests of their employees by denying annuity sellers access to their savings.

Jane White is the president of Retirement Solutions LLC, an advocacy and educational organization dedicated to the retirement adequacy of 401(k) participants. Her writings represent her opinions alone, not those of Employee Benefit News, its staff or parent company, SourceMedia. Although this is Jane's last column in EBN, we thank her for her passion and unwavering candor over the years and wish her the best in her future pursuits.