More than 74 million people have a 401(k) plan to prepare them for the day they don’t have to work. But most employers don’t offer investment options that might help retirees spend what they’ve saved more predictably.
Such options are called lifetime or retirement income solutions and are similar to defined-benefit plans where participants get a set monthly income. These products are guaranteed or variable annuity options, but instead of purchasing them at retirement, workers put dollars in the products just like any other investment choice in their 401(k). At retirement, participants get a steady paycheck for life from the annuity.
“What people have wanted is to accumulate wealth” in 401(k) plans, said Diane Garnick, chief income strategist for TIAA. “It’s only now that the baby boomers are turning 71 that they are demanding retirement income solutions.”
Historically, lifetime income has not been popular with employers for various reasons. They are tough to explain easily, employers see them as a commitment and there’s always the cost factor to consider and the potential for being sued for having pricey investment options.
But as Garnick said, the largest wave of workers is retiring on a daily basis, and they are realizing that they don’t know how to budget a spending plan for retirement. In fact, respondents to a recent TIAA survey said only 50 to 69 percent of their current income would be enough to live on in retirement, when most experts say 70 to 100 percent is needed.
Meanwhile, with automatic features becoming so highly used in plan design, many participants don’t have to think about much because they are used to setting their retirement savings goals once and forgetting about the plan, she added.
“We are now asking people to make a very proactive decision and to figure out their finances,” Garnick said. “In many ways, it’s the most irresponsible thing we do.”
More than half of respondents to the recent TIAA survey said the most important goal of their retirement plan should be to provide a monthly income stream for life. If given a choice between a $500,000 lump sum and a check for $2,700 each month, 62 percent said they’d choose the monthly option.
“We were so happy to see this,” Garnick said.
But a good bit of education is needed, the survey showed. Nearly half of respondents didn’t know whether their 401(k) offered a lifetime income solution. Plus, 63 percent said they thought their target date fund would provide a monthly paycheck for life. That would only happen if an annuity option was built into the fund or if the participant purchased it on their own.
Employers are starting to see what is happening, and slowly heads are turning. According to investment consultancy NEPC’s 2017 “Defined Contribution Plan and Fee Survey,” about 8 percent of plans reported offering a lifetime income solution investment as part of their plan lineup.
“Five years ago, most [employers] reported no lifetime income” investment option, said Kevin McCullough, analyst at NEPC. “It continues to be a focus in the marketplace even though we haven’t seen a migration in that direction.”
Garnick added that employers are waiting for Congress and the Labor Department to make it easier to adopt lifetime income products into their investment fund lineup, but particularly into target-date options. Ideas have included tax incentives for employer contributions as well as federal guidance for employers to show participants what their balances might look like in retirement on a monthly basis.
“There is opportunity here,” she said.
Patty Kujawa is a freelance writer in the Milwaukee area. Comment below or email firstname.lastname@example.org.