Why Guaranteed Annuities Belong in 401(k)s
April 17, 2015
By: Jeff Kelly
ORIGINAL SOURCE - http://blogs.wsj.com/experts/2015/03/13/why-guaranteed-annuities-belong-in-401ks/
Annuities often get a bad rap in the public marketplace. You'll read they have high fees. You'll read they have high commissions. You'll read that financial adviser salespeople love to sell them. However, if you talk to some of the happiest people in retirement like my own mother, you'll hear that one of the main financial reasons she is happy is that a fixed paycheck comes to her each and every month for the rest of her life. She doesn't worry about the stock market, the bond market or the real-estate market. The reason is because she gets payments from an annuity for the rest of her life.
One way to give more investors that kind of peace of mind is to require all employer-sponsored 401(k) plans to have a guaranteed-income annuity as an investment option.
Consider for a moment that pensions have all but disappeared from major Fortune 500 corporations and most people today are suspect about how much they will get from Social Security. So the burden of saving for retirement is squarely on the shoulders of you, the individual. While most 401(k)s offer 10 to 20 choices on where to direct your funds (and now most offer target-date funds), it still can be extremely confusing and challenging for the average investor to know how to allocate their 401(k) funds.
In a recent study I conducted at my firm, I asked 100 individuals if they use the automatic-rebalancing feature available to them online through their 401(k) provider. The answer: 98 of the 100 didn't even know that automatic rebalancing was as an actual feature. Each one of the professionals I asked were making more than six figures and had a 401(k) balance of more $100,000.
Guaranteed deferred income annuities, which allow you to put away a portion of your paycheck or savings and then at a certain age down the road start getting a guaranteed income, could be an excellent option to give retirement-plan participants a steady stream of income in retirement. (Other guaranteed annuities, including variable annuities with income-protection riders, are also options.) This may be more expensive than a low-cost ETF or mutual-fund strategy. But given the choice, wouldn't many consumers want to spend the extra money to know that they will have a retirement income they cannot outlive?
The challenging part about adding guaranteed annuities to 401(k)s is that the investment choices in the plans vary widely. Although there are new fiduciary standards for fee disclosure and investment choices, there is no mandate for an option to pay for a guaranteed income stream.
Isn't having a guaranteed annuity option for 401(k)s worth a debate? Or should we just assume that the average American not only knows how to accumulate money in his or her 401(k) but also has the skill to know how to distribute it and make it last during retirement?
Call Jeff Kelly today at (989) 892-6666