Amid discussions and proposals to make 401(k) enrollments and participation mandatory or by default, here comes a relatively new idea from the folks at Nationwide Financial Services: Let employer contributions to 401(k) plans eventually convert into an annuity. The concept makes a lot of sense -- if only in theory.
Pensions have been disappearing over the past few decades, leaving employees largely responsible for their own retirement income with the help of employer-provided tools such as 401(k)s. But while pensions offered a defined payout in retirement, the final earnings from a 401(k)s all depend on how the account's holdings do. If the stock market implodes, as it did in 2008, it could devastate a stock-heavy 401(k).
A pseudopension?
Thus, the idea of adding annuities into the mix is a welcome one. Some annuities, such as variable or equity-indexed ones, aren't exactly ideal choices. But immediate, lifetime annuities, or fixed, deferred annuities really do offer you an unwavering income for a set period of time -- which could be the rest of your life.
Right now, employee and employer contributions often go into the same account, with workers sometimes able to control where most or all of that money goes. They can even borrow a good chunk of it, if they're in a pinch. But Nationwide instead suggests that workers continue to control the money they contribute, even as employer contributions get invested entirely toward an annuity.
A few problems …
Annuities are very pension-like, and with this plan, it can seem like your employer will be offering you pension-like income. Alas, the actual sum you receive will likely be far less than what you need to pay living expenses. One estimate shows that a 65-year-old man might be able to generate $600 per month from a $100,000 annuity -- nothing to sneeze at, but hardly enough to live on.
Part of the problem is that you exchange the security of guaranteed payments for some of your possible returns. Stock returns, after all, tend to far outpace fixed-income (bond) returns over long periods. It's a valid trade-off, but a costly one.
… and a few solutions
Still, the Nationwide proposal is a great reminder about the power of annuities, and the peace of mind they can provide via guaranteed income. With some advance planning and aggressive and effective saving and investing, you may be able to secure a significant annuity income in retirement, essentially buying yourself a pension.
Consider annuities as part of your retirement plan, but don't count on employer contributions to amount to enough to provide for all your needs, unless you've run the numbers yourself. By taking matters into your own hands, you can build your own comfy retirement through annuities, dividends, or a combination of both.
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