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Vanguard has announced it will be offering an annuity option to 401k plan sponsors next year. It will allow the participant nearing retirement to elect a portion of their account to be an annuity payment.
Let’s hope plan sponsors add the option
A steady income stream and still keep investments. I have been advocating for this for years.
HALLELUJAH ‼️‼️‼️
There should be an option for you to purchase guarantee income only if you live longer than 95 years old. About 10% of people retire at 65 would live pass 95, so if you worry about running out of money if you live that long, you should be able to purchase that future guarantee for a smaller premium. (from one of the investment advisor firm)
Hung, are there any insurance companies that will issue a deferred annuity to someone that old?
Here’s my two nickels (pennies are history). An annuity option should be available at the time of retirement. It should be a single premium immediate annuity (SPIA), with the same options as a defined benefit pension, as well as a return of premium rider. Participants should retain control of the assets during the accumulation phase.
The insurance industry is a powerful lobby, and is probably foaming at the mouth with the possibility of mucking up the system with all sorts of goofy annuity products, and the fees that come with them. Lawmakers should strictly regulate the types of annuity used in retirement plans.
I know many workers who enter a state of paralysis when faced with investment decisions and risk. Such folks often have all their savings in the stable value fund, earning sub-par interest rates. For such folks, I’d like to see options available for building CD ladders. I think they are available in certain defined contribution plans, so why not all plans?
R Quinn…Unlike several of those responding to this article, I agree with your perception of this being a positive step forward for the average employee and average investor. Based on the lack of financial intelligence of the vast majority of consumers of financial products, having the options worked out for them is key, since otherwise, they would either pick wrong or not pick at all. Sort of like people in 401-k or 403bs, with all their money in GIC accounts.
As someone who purchased a series of 4 large annuities prior to retirement, 3 of 4 with Roth Dollars, I absolutely love the checks that are deposited in my bank account on the 5th, 6th, 7th, and 15th of every month, along with our social security checks on the second Wednesday of every month. Having a significant guaranteed income provides the greatest peace of mind imaginable.
Just like I find on the Bogleheads website, many HD readers are apparently “annuity averse,” to say the least.
The one annuity I funded with Traditional IRA dollars will be converted to Roth over the next 2 years, while keeping me in the 12% tax bracket, and within 4 years, approximately 50% of my current traditional IRA will also be converted to Roth Dollars, because of the One Big Beautiful Bill provisions in effect for these 4 years. Five years from now, 90% of my income will either have COLA and/or be income tax-free.
Those opposed to annuities are only too happy to accept their Social Security Checks…the world’s best annuity…so it is a mystery to me why so many are averse to owning additional annuities controlled by the investor.
To each their own…so they say!
What Social Security payout option do we have? I’d have rather invested my 15.5% (or thereabouts) of income myself as I can trust myself.
And you would have been able to cover all the things SS does beyond your own retirement like divorce, early death, disability, survivor benefits, a disabled child? SS is a broad insurance, not simply retirement income.
How about job loss along the way or a serious bear market in the ten years before you retire?
The theory people can do better investing SS taxes on their own only works if everything is perfect in your life for 40 plus years and you have the discipline to invest it all no matter what.
Do you know anyone with a life like that? Not me. 🤑
In today’s Wall Street Journal, Jason Zweig has a (related?) take on changes in target-date funds, saying: “Leave it to Wall Street to take a cheap, simple, elegant idea and junk it up with fees, complexity and opacity. … Many of these funds are getting cluttered with extra holdings. Things might get worse if so-called alternatives managers have their way and start stuffing illiquid, risky and often expensive private-markets assets into them.”
https://www.wsj.com/finance/investing/do-you-really-know-whats-inside-your-401-k-c480ec9c?st=pda75i&reflink=desktopwebshare_permalink
Here is a Morningstar article with the details on the new Vanguard Target Date series:
https://www.morningstar.com/funds/vanguard-unveils-first-new-target-date-series-since-2003?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_69773&utm_id=36308
Can I ask what might be a dumb question? In the UK, an individual can take a portion of their retirement portfolio and purchase an annuity if they choose to. Is that not also the case in the US with an IRA or with a 401(k) that’s been rolled over into an IRA? Am I missing something here?
They absolutely can, however given all of the questionable sales tactics (like selling a high fee product instead of a simple SPIA/DIA) that some brokers employ, it is good to have someone like Vanguard do all the vetting. Also, until recently (I believe Secure 1.0) any money coming from a qualified (i.e. tax deferred like an IRA, 401k) would not have counted toward the RMD but now I believe it does.
Yes, they can.
Nothing wrong with providing 401k participants access to annuity purchase platform where they can evaluate the many different kinds of guaranteed income products – annuities, GMWB, etc.
However, that is not what Vanguard is doing. What they are doing is adding a guaranteed income feature to their target date fund series. That is adding an opaque insurance product to an already opaque investment option – where the same investment option is typically the one selected as the Qualified Default Investment Alternative (QDIA).
The QDIA is the investment option used for participants who have no idea how to invest and those who don’t want to make investment decisions.
So, only the uninformed support embedding a guaranteed income feature (annuity insurance contract) within a target date fund series, such as Vanguard is proposing.
Simply, embedding an opaque feature in an already opaque investment option takes advantage of participants who were either defaulted into the TDF or who affirmatively selected the TDF (because they were uncomfortable making investment decisions).
By adding the guaranteed income feature, the typical process is to start at age 50, by changing the allocation in the target date fund, to take some of the equity investment and some of the bond investment, and use it to purchase an increment of income guarantee (insurance/annuity). That reallocation continues along the glide path for the next 15 years, such that by the time the individual reaches age 65, 15% – 25% – 33% of all assets have been used to purchase an insurance contract.
Because TDF disclosures do not typically include specific detail of the underlying funds, and more importantly, for those who accept the default or select the TDF to avoid investment decision making, even if there are disclosures, few read them.
So, what’s wrong with that?
First, the embedded guaranteed income feature will be a single form of annuity. By definition, it won’t be best option for everyone in a highly diverse workforce, with highly diverse account balances and needs.
Second, given historical take up rates for guaranteed income product, only 5% – 10% will actually annuitize, commence monthly insured/guaranteed payouts. The remainder will forego annuitization, deciding against the guaranteed income/annuity, meaning that they paid insurance premiums for 15 or more years and got nothing for it.
Third, the plan investment fiduciary has to decide what option to offer, and there is no way they can identify the one, the very best option, for even a minority of participants who ultimately annuitize … because there is no such very best option.
Fourth, fifteen years from now, during the period of incremental purchase, insurers will introduce a number of other forms of guaranteed income, some with superior features or lower fees. However, the plan and the participants are stuck with the annuity already purchased – unless they distribute the annuity to an IRA and the individual goes through the expensive process of a 1035 exchange.
Fifth, wary individuals who see the change starting at age 50, and opt out of the TDF, those who accept the default or those who selected the TDF because they didn’t feel capable of making investment decisions, they will now have to make other, affirmative investment decisions because plans typically don’t have two sets of TDFs.
Sixth (and I could go on), any annuity under consideration is already available as an individual annuity in the marketplace, all you have to do is roll over assets to an IRA and make the purchase – so, why would we want employers to make this decision, and stick everyone in a single choice that doesn’t meet the needs of the vast majority of participants.
So, why would service providers take this action to embed guaranteed income into the target date fund series, it is called increased asset retention, plus more fees, more revenues, more profits.
I slightly disagree with your assessment, I do think this process that Vanguard is employing of insulating the end user from having to choose an annuity but providing the required income is a good thing. Especially for the majority of the folks that are not financially (or Annuity) savvy. It simplifies the lifetime income need. My $0.02.
Jeez Jack, I thought Vanguard was the king of simplicity; this sounds confusing as heck.
See my post above for a link to Morningstar’s fairly detailed explanation of how the fund will work
Thanks, that helps!
Oh Jack, big picture. What matters is a simple way to create an income stream even if it isn’t optimum from a financial perspective. It must be better than what many people do now, which is nothing and are left to figure it out. Unfortunately, most participants do not have the desire or ability to evaluate much of anything.
See the article I draw attention to in my post today, which supports the contention of the last paragraph here.
My wife retired from TIAA which has been offering defined contribution plan annuities in the retirement plans they administer since 1918. Covering your fixed expenses with guaranteed income every month is a blessing. Every plan should offer it.
I’ve also got a nice chunk of my retirement money in TIAA-CREF, a 403(b) investment vehicle for nonprofits, as opposed to a 401(k). My employer had a good match which helped build it in my working years. I’ve not yet taken the annuity option, and it has grown very well, even as I have taken the RMD each year. Eventually I’ll convert it to an annuity.
Yes they should. Individuals will be able to create their own pension. The next step is an option that will allow gradual accumulation in an annuity over all the years of participation without the need to make that lump sum purchase decision.
TIAA allows participants to do it either way. If they contribute each pay period over their employment, TIAA will release surplus reserves and increase the employee’s pension check. This increase happens in about half of the years. Only Social Security is a better deal.
I have about 50% of my retirement funds in the TIAA “Traditional” account which I will eventually turn into an annuity. I appreciate their “loyalty bonus” since I started putting money into the account almost thirty years ago.
Looking at BenefitJacks post, are all the ins and outs of your annuity important to you as an investment or is it more important that you will be able to generate an additional lifetime income stream.