This uncomfortable conclusion is driving the government, employers and particularly insurers to come up with an alternative -- something that works a lot like an old-fashioned defined benefit pension plan.
So far, the likeliest candidate is an annuity within a 401(k) plan. Last September, the U.S. Department of Labor's Employee Benefits Security Administration and the Treasury Department sponsored a hearing on these lifetime income options. At the end of the sessions, it seemed clear that annuities within 401(k)s were a concept that employers, the government and -- especially insurance companies -- were happy to embrace.
Enthusiasm doesn't trickle down
There is just one big problem. Most employees are somewhere between stone cold and lukewarm to the idea. The Department of Labor asked for public responses to its proposal to approve annuities as "safe harbor" investments within retirement plans. The average response among the 800 received wasn't too far away from this one by Ross L. Webster, a retired Marine from North Carolina:
"Do you think Americans are IDIOTS? You would like to take our hard-earned money in IRAs and 401(k)s that WE CONTROL and promise a lifetime annuity that we can trust YOU to pay in the future?"
Despite public skepticism, some employers and retirement plan sponsors are already offering annuities or annuity-like products in 401(k)s. Prudential Financial says it has about 6,000 401(k) plans that have made its Income Flex plan an option for its employees. Phil Waldeck, a vice president who leads Prudential's pension plan risk management, says the key is to provide a plan that guarantees a minimum payout while providing participants with potential increases if the market is good and their savings grow.
New and improved annuities
"When you say annuity, people think single balance that converts into a fixed-income payout that is flat and irrevocable. People don't want that. What we're offering is a variable solution with a minimum withdrawal benefit with upside potential. That is starting to be embraced," Waldeck says.
Most participants in the Prudential plan, Waldeck says, choose to move their money into the accumulation phase of the Income Flex plan when they are around age 50, the youngest age at which they can secure a guaranteed minimum amount. That gives them time to increase contributions so they can lock in as high a payment as possible at retirement. Once they move their money to the plan, participants know the minimum that they will receive monthly no matter what happens to the market as they approach retirement.
When they reach retirement, if their nest egg has grown significantly, plan participants have the opportunity at specific times to revise the guaranteed payment amount upward. But if the economy falters during the accumulation phase like it did in 2008, they can be confident that their monthly checks will continue to be no lower than the minimum they had been guaranteed.