Saving for retirement is one of the most important long-term financial challenges you'll ever face. Setting aside money for use years or even decades from now requires a lot of foresight, but what makes the task a lot easier for many workers is access to workplace-sponsored retirement plans like 401(k) accounts. Those that have 401(k)s at work are generally a lot more confident about their retirement prospects than those who don't, and the ability of 401(k)s to help you save on a tax-deferred basis while enjoying extra benefits like profit sharing or employee matches makes the retirement vehicles particularly attractive.
401(k)s are useful, but they're not perfect. In particular, when it comes time to retire and spend down the 401(k) assets that they've saved throughout their careers, most workers want predictability and stability in the income that their retirement nest egg generates. Unfortunately, a simple thing that employers could do with 401(k) plans isn't readily available to most workers, leaving them without their ideal solution to their financial challenges.
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Wanted: guaranteed income
Eight out of 10 workers who have a 401(k) or similar employer-sponsored retirement account expressed interest in a guaranteed income option for their payouts, according to the Employee Benefit Research Institute's 2018 Retirement Confidence Survey [opens PDF]. The survey showed that participants were just about equally interested in two specific choices: having an investment option within their 401(k) plans to guarantee monthly income for life when they retire, or taking money out of their 401(k) plans after they retire and investing in an outside financial product that would provide guaranteed lifetime income on a monthly basis.
It's not surprising that 401(k) plan participants would want the security and predictability that guaranteed income would provide. Many workers wish that their employers had retained the monthly pension plan benefits that they offered before 401(k) plans became popular and crowded out traditional pensions at most companies. Instead, 401(k)s create the uncertainty involved in having to invest your own retirement savings, and although that can leave you with more money when markets are favorable, the risks of an ill-timed downturn can make many less sophisticated investors nervous about how to protect themselves.
Indeed, the idea of having 401(k)s offer such payments more broadly has had bipartisan support in recent years. In 2014, the Treasury Department under the Obama administration issued guidance that encouraged the use of income annuities within the plans. The Trump administration followed up in 2017 with its own similar proposal. Yet only about 5% of 401(k) plans offer products with guaranteed income, according to stats from the Plan Sponsor Council of America, largely due to concerns about whether regulations allow them to offer the products without running afoul of their fiduciary duty to participants.
What retirees can do right now
Yet the EBRI survey results also indicate a lack of knowledge among 401(k) plan participants, because there's a perfectly viable option that they can use right now to create a guaranteed stream of income after they retire. With a rollover of all or part of their 401(k) assets to an IRA, retirees can then choose to invest retirement funds into an immediate annuity.
Immediate annuities are products offered by insurance companies that are specifically designed to produce guaranteed income. Immediate annuities offer many different options, including payments that can rise over time to keep up with inflation, or ongoing payouts that can go to a spouse or other family member after your death.
The problem with immediate annuities, though, is that it can take a lot more money than you'd think to generate even a modest monthly payment. For instance, the typical Social Security payment right now is in the neighborhood of $1,300 per month. For a 65-year-old man to get that based on recent rates, he'd need to use almost $240,000 in retirement assets. Rising interest rates might boost payouts in the future, but with many people having only modest 401(k) savings, immediate annuities aren't always able to provide the income that people really need.
Unless employers come up with an alternative to private immediate annuities within 401(k)s that can generate greater income in retirement, many workers won't be able to afford an annuity-based solution that's big enough to give them the monthly payout they want. For them, the best solution will be to take control of their investing and make their savings work as hard as it can to support them throughout their retired years.
