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I have expressed my opinion on the need for and desirability of a steady income stream in retirement, as guaranteed as possible. Next Friday my pension will be deposited in our bank account. On the second and forth Wednesday each month our Social Security will be deposited. All that has happened each month for the last seventeen years.
I don’t worry about withdrawal strategies, withdrawal percentages, guard rails, tip ladders or any similar strategy. The IRC tells me what I must withdraw from my IRA.
I realize that most Americans will need to deal with all that planning, but I can’t imagine it is preferred. DIY may be fine fixing a sink, but given an alternative, for life income?
We are very fortunately among retirees with a pension. Only about 19% of all current workers have a pension.
Pension coverage is significantly higher for state and local government workers (75% participation) compared to private sector workers (11% participation in pension plans).
According to data from the Federal Reserve’s 2023 Report on the Economic Well-Being of U.S. Households, 56% of current retirees in the U.S. received income from a pension.
Given the choice between any form of lifetime annuity income and managing your investments, withdrawal strategy, and with at least the possibility of running out of money, which would you choose?
It appears a large number of workers may agree that annuity income is desirable.
A new survey reports that about 90% of participants surveyed said they would enjoy the inclusion of a fixed annuity in their 401(k) plan. A majority also favored integrating fixed annuities into target-date investments.
93% of 401(k) plan participants said it is important that they have the option to convert their savings into guaranteed monthly payouts, according to a Nuveen and TIAA Institute study.
The problem with guarantees is the cost or premium. CDs offer a guarantee for periods measured for up to 5 years. Treasuries offer their own guaranteed returns if held to maturity.
I’m not ready to pay the premium an annuity demands to get a “guaranteed” return that is less than that of the S&P 500, but more than cash or certain bonds.
Guaranteed income is an underpinning of the social security system, which is backed by the U.S. government. Yet, a lot of time is spent ruminating about system failure, reduction in benefits, etc. State pensions have their problems, too. Illinois for example is chronically underfunded. From time to time the politicians attempt to get voter approval for a convention to amend the constitution. This has yet to occur because people don’t trust the legislature and are fearful of a cut in pensions.
The insurance companies holding cash and providing a “guaranteed” payout for years has risk, too. More than a government SS pension. I do recall when Universal Life policies were in vogue. These became too expensive to sustain and there were losses and bankruptcies.
As I’ve noted previously insurance companies do fail from time to time, and when that occurs annuity holders may get 50% after a few years. The retort is always the same 1) Few insurance companies fail and 2) It is usually the small companies that fail. Yes, they are relatively rare, but so are stock market crashes. AIG and Conseco failed although the U.S. government intervened.
For the curious here’s a list of 20 notable insurance company failures.
https://www.linkedin.com/pulse/20-most-notable-insurance-carrier-failures-jeff-affronti
Here’s a rhetorical question. If infrequency is a measure then why worry about stock market crashes? The really bad ones occur infrequently.
Failure over how many years and many were not issuing annuities. My former employer recently turned over $5 billion to Prudential to buy annuities for 3,000 retirees. I’m pretty sure they made sure there was minimal risk.
You come at all this from the perspective of a knowledgeable person capable of managing your money. I guarantee that’s does not represent the great majority of 401k participants many whom already put their money in a GIC.
It is worth noting that the survey was conducted by Teachers Insurance Annuity of American-College Equities Fund that was founded by Andrew Canegie in 1918, and that Nuveen is a subsidiary of TIAA. Thus it isn’t surprising that they are touting the results of their survey.
My wife and I are retired academics who have most of our 403(b) IRAs in TIAA’s equity and traditional annuity funds. We viewed our contributions to the traditional annuity fund as an alternative to bonds. We have several options in addition to annuitizing the money in our traditional annuity accounts and have chosen to simply take RMDs for now.
A large number of workers think that a 401k isn’t worth participating in. What good is an annuity option in a 401k if people aren’t funding the 401k.
IBM has changed from 401k matching to creating a defined contribution pension because participation was so bad and tilted away from sub groups like women.
I don’t think there’s a change, aside from forced participation, that will make a dent in the issue you’re pointing at. There’s zero evidence that the availability of an annuity will get people to fund said annuity.
To quote Pogo,”We have met the enemy and he is Us!”
I’d guess (based on anecdotal experience) that annuities within a 401k would stink like week old fish. Corporate insiders would get junkets where they get sold crappy high cost, low portability annuities that then become the only available option. So I’d say ban annuities in 401k’s.
As someone who designed and managed 401k plans, that is unlikely in any significant size corporation as they would be violating fiduciary responsibility. A junket would not be worth the risk or corporate reputation. Plus those decisions are not typically made by one person.
Yet it’s happened and continues to happen all the time. Fiduciary responsibility DOES NOT include shopping for what’s cheapest and most valuable to participants. As long as the plans offer things that are within industry practice they clear that very low boundary.
We (in my family) have perhaps 10 or 20 times as many experiences as you. Such that, anecdotally, we’re perhaps 15 times more experienced than you, having one.
There are both good and bad providers, plans. Including annuities, given what’s industry practice, and the opportunity for bad actors to court corporate providers, it would be a wide open door for insanely abusive practices. I can’t think of a single way to protect people from that.
What I could get on board with is forcing all 401k plans to offer the ability to annuitize part or all of the funds and that companies be forced to eat some percent of the costs (maybe 50-50). But annuities within a 401k sounds like an absolute disaster.
I disagree with your interpretation of fiduciary duty. Besides a lawyer can make any case they want for plan participants if they feel aggrieved.
Fiduciaries must ensure that all plan fees and expenses are reasonable, necessary, and fully disclosed. They should periodically benchmark fees against industry standards.
If fiduciaries hire third-party service providers (like recordkeepers, investment advisors, or administrators), they have a continuing duty to monitor those providers to ensure they are performing competently, timely, and for reasonable fees.
Could you clarify the experience?
I’m a fan of immediate-fixed annuities, but I think you’re right: The offerings within 401(k)s aren’t likely to be the simple, frills-free version that I favor.
Just want to make clear that my post wasn’t anti-annuity, just that there are clear reasons why this could be an awful awful solution that ought to be rejected.
Here’s another, what about the portability feature of a 401k, how do annuities conquer that mountain when everything about an annuity contract is opposed to portability. If TIAA/Nuveen proposes that annuity offerings eat all of that type of expense such that participants don’t suffer any consequences of job changes and plan changing, it would at least give the proposal some credibility.
We need to think differently, something new that will allow a portion of 401Ks savings to be used nearly seamlessly like a DB pension. Perhaps with the employer match alone under a group contract. It may not exist, but why couldn’t it in the future?
As a college professor, I have my retirement funds in TIAA. They offer, I feel, something pretty close to what you’ve described here. A portion of my and my employer funding each month goes into a TIAA annuity fund that pays a minimum of 3% interest. As someone else here said, I see that like a bond. When I retire, I can convert that money into a variety of different types of annuity, or wait to convert. The annuitization rates are very good compared to other places if you use this fund for an annuity. I think this is a solid, sensible offering by TIAA.
All that said, TIAA also offer a “Social Choice” fund that I know a lot of my colleagues have their money in, as they believe it to be a socially responsible fund. Even after I pointed out to my colleagues that “social choice” actually means the fund is pretty heavy into McDonald’s and ExxonMobil, I bet very few of them made any changes, showing that TIAA is also very good at marketing.
People have the option to annuitize savings right now. Most large employers and many smaller ones already offer the chance to do this at retirement often on good terms (providers discount for the introduction to employees).
There’s already defined contribution pension plans (which are precisely what you’re pushing, that is after all what an annuity in a 401k would be).
What is the tangible benefit to participants?
According to a LIMRA estimate, only 14% of defined contribution (DC) plans currently offer participants the option to annuitize their plan balances. Other research from LIMRA indicates that as of November 2023, an estimated 9 out of 10 defined contribution plans did not offer an in-plan annuity option.
Not sure what you mean by a defined contribution pension plan unless you are thinking of cash balance plan, but they are actually DB looking like DC.
Have to agree. And the idea of gradually purchasing an annuity seems fraught with downside. There’s a whole load of actuarial maths and inflationary hedging to get to a meaningful portion of an annuity at 65 from a year’s worth of contributions at age 20, even if the insurer survives those 45 years plus the retired years. Can’t help but think insurers would protect themselves by under quoting.
This after all is the same problem that saw corporate employers get out of the pension game.
I don’t think there is anything wrong with letting the markets do their thing for decades within a 401k then having the option to convert to a pre-tax annuity within the wrapper after a certain age. Then those like RDQ who are safety first can get what they get and everyone else can mix it up a bit to their appetite.
I agree with the importance of annuities in retirement income. 90% of people in the survey want the option, yet according to the Center of Retirement Research at Boston College, only about 12% of retirees actually purchase one.
I suspect several factors are to blame: lack of understanding, reluctance to part with their cash, periods of low interest rates, and of course the lack of the option inside the 401K.
The issue with this type of poll is that it’s usually presented without any clarity as to what the real cost, experience would be like. Do you think people would say give me an annuity option in a 401k if it meant that when you change jobs, you get 50% of what you saved? Then it becomes 0%.
There are good reasons why only 12% of people purchase annuities. The group most likely to benefit is also the group most unlikely to save and defer to retirement. Then the group with the highest savings rates are likely to not need an annuity to create income streams in retirement.
The pertinent question, out of those that can afford an annuity and have the need for one, what percent of those people (the good match group) buy an annuity.
The key word is purchase. That’s a big hurdle which is why if the option is within the 401k, the purchase happens over many years and turning over a pile of cash may be avoided.
Richard, I think you are absolutely correct. The average retiree probably wouldn’t go online to purchase an annuity by transferring a hunk of cash to a faceless insurance company. And as Jonathan has pointed out in the past, the insurance agent (whose face you can see) often won’t sell one because he/she won’t earn a big commission.
As below anyone can buy. I guess reading between the lines this is the annuity insurance industry trying to make it more standardised and “automatic”.
What people really want is a pension with COLA. That ship has long sailed and annuities are a poor substitute not least because of the high volatility of rates depending on time of purchase and the difficulty for the layperson of deciding between a flat annuity and one with inflationary indexing (or an fixed escalator).
Security of income is all well and good but when that income secured is a fraction of the return the purchase amount would make if it continued to be invested there is at least a clear opportunity cost in the decision to annuitize as well as luck of the draw in timing.
Pensions with COLAs in the private sector were always rare. Only taxpayers in the public sector could afford them. My pension is from a plan adopted in 1911 and never had a COLA.
You can’t look at annuities as investments and compare returns with investing. What matters for most people is the guaranteed income stream. If they were integrated with the 401k and grew gradually as one alternative in the plan, it would be easier for people to use them.
Pensions with COLAs may have been rare in the US, not necessarily the case elsewhere. The UK branch of my US-based megacorp provided pensions with COLAs, the US parent didn’t. The tiny part of my pension paid by the UK branch still has a COLA.
With enough years and/or enough inflation a pension without a COLA loses a great deal of its value.
Correct, in all my years preparing taxes I can’t recall a single private company pension with a COLA.
Perhaps the two (at least) down voters would care to explain their reasoning?
My point is that what people would ideally want. It’s what they get from SS after all.
I see your point on integration with the plan but the needed flexibility is great. Let’s say flexibility to buy annuity between age 50-70 plus different types of annuity per personal circumstances.
I don’t know what “grew gradually” means other than grew as invested in the portfolio. Anything else becomes a complex product involving potentially commitment to a fixed outcome at a time when people are ill equipped to make judgements. e.g. how does a 20 year old know whether $500 per month contribution to pay them a flat annuity at $20k pa from 65 (if they continue those contributions) is a good deal?
Anyone can buy an annuity using the funds in their 401K, Roth, or IRA, if they want an annuity.
True, but I think the point is to make them part of the 401k and avoid the withdrawal, tax , buy process. Perhaps even an after tax saving option in he 401k for that purpose.
Annuity income is not desirable if you have large balances. You may want to minimize taxable income, not maximize it.
Suppose you are 73, and facing RMDs. If you have $10 million, your first RMD would be $377K. If you annuitized, you’d probably get at $600K a year. If you don’t want to spend this much (and pay taxes on it!) then the RMD is a better option for you. You can also use QCDs with distributions, but they don’t apply to annuities.
Having $10M in retirement will affect @ 0.06% of the US Population…or @200K out of 300+M Americans. I doubt HD is geared at that demographic.
I don’t think that is a problem. The average balance for those 65 and older is $272,588, and the median falls to $88,488 according to NerdWallet.
The number of retirees with a $10 million 401k is unlikely to be very large. I believe we are talking about the majority of future retirees with more modest balances.
Indeed we are and retirees who don’t understand many of the financial moves and strategies discussed on HD.
93% of livestock agree it’s important leave cattle pens unlocked and unguarded at most times, says study from the Wolf Institute 😂
Jokes aside, I’m perfectly fine with including an annuity option in retirement accounts, but 90% and 93% consensus? Does that not look suspicious to you as much as the backers of the study? There’s not 90% consensus on any aspect of annuities, except maybe that 90% of Americans don’t have a clue what they are! I’d take this research with a cube of salt. They’re paying for promotional material here.
Also, it leads off with noting how common this option is in non-profit 403b plans, but not in 401k plans. That’s because 401k plans have much stronger consumer protections through ERISA than many 403b plans, which are not all subject to ERISA. Just take a look at the average school 403b plan options, they can have tens of different providers to choose from, each with its own confusing list of investment choices. 401ks are child’s play in comparison when it comes to making investment choices. TIAA is one of the top players in this mess.
I want to be clear, I’m merely calling into question this study funded by TIAA that is mentioned above. Annuities are what they are, and are at times appropriate and sound investment options. This study, however, smells in all the wrong ways.
Not ERISA, but many very similar requirements.
We are very satisfied with our COLA-enhanced pensions and will be even more satisfied when we elect to start receiving social security benefits. With more pension income than expenses, I don’t foresee any possibility of running out of money! We are fortunate.
That’s the value of pensions – and annuities.
“The IRC tells me what I must withdraw from my IRA.”
What is the IRC.?
Internal Revenue Code