Annuities: The next big retirement option?
More and more Americans are facing the prospect of retiring on savings and Social Security, without the reliable pension checks their parents received. At the same time, it is becoming increasingly clear that getting through retirement by living off investments is too difficult and unpredictable for most of us.
This uncomfortable conclusion has been driving the government, employers and particularly insurers to seek out an alternative -- something that functions a lot like an old-fashioned defined benefit pension plan.
So far, the likeliest candidate is an annuity within a 401(k) plan. When the U.S. Department of Labor's Employee Benefits Security Administration and the Treasury Department sponsored a hearing on these lifetime income options, it seemed clear that annuities within 401(k)s were a concept that employers, the government and especially insurance companies were happy to welcome.
Enthusiasm doesn't trickle down
There is just one major problem: Most employees are somewhere between stone cold and lukewarm to the concept. The Department of Labor sought public responses to its proposal to approve annuities as "safe harbor" investments within retirement plans. The average response 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 offering annuities or annuity-like products in 401(k)s. Prudential Financial has its IncomeFlex plan. Phil Waldeck, a senior vice president who leads Prudential's pension plan risk management, says the key is to offer a plan that guarantees a minimum payout while providing participants with potential hikes 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 put their money into the accumulation phase of the IncomeFlex plan when they are around age 50, the youngest age at which they can secure a guaranteed minimum amount. That gives them time to boost 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 income amount that they will collect monthly no matter what happens to the market as they near retirement.
When they reach retirement, if their nest egg has grown significantly, plan participants have the opportunity at specific times to change the guaranteed payment amount upward. But if the economy falters during the accumulation phase, as it did during the 2008 financial crisis, they can expect that their monthly checks will continue to be no lower than the minimum they had been guaranteed.