Magazine article Workforce Management

Auto-Annuity Could Stretch 401(k) Savings

Magazine article Workforce Management

Auto-Annuity Could Stretch 401(k) Savings

Article excerpt


With automatic enrollment into 401(k) plans now the norm among employers, many say that defined-contribution plans are looking a lot like defined-benefit plans these days. A proposal by the Retirement Security Project could make them even more similar.

In June, the Washington-based think tank published a paper proposing a way that companies could automatically enroll a portion of retiring employees' 401(k) assets into a lifetime income option that would provide them with monthly payments.

Under the plan, a portion of a retiring employee's 401(k) assets would automatically be swept into an annuity product chosen by the employer unless the employee opts out of the program. Retirees not opting out would stay in the plan for a trial two-year period, during which they would receive monthly payments from their 401 (k) plan, according to the paper. After two years, retirees could choose to continue with the plan or cash out.

The goal is to make sure retirees' savings last them through retirement, says Lina Walker, research director of the Retirement Security Project, a joint venture between the Brookings Institution and Georgetown University.

Too often, employees cash out their 401 (k)s when they retire, she says. And while it might not be a big issue now since many retiring employees have both defined-benefit and defined-contribution plans, that won't be the case in a few years, Walker says.

"Most people retiring now have both a 401 (k) and a defined-benefit plan, so the whole issue of improving the payout options within a 401 (k) hasn't been a big deal," Walker says. "But that's not going to be the case 20 years from now."

By having a two-year trial period for retirees to receive monthly payments, the plan could help change the mind-set of many retiring employees who are hesitant to keep their money in an annuity product, she says.

"We know that a lot of people undervalue lifetime annuity products because they don't understand how they work and often the pricing isn't transparent," Walker says. "This could make it easier for them."

Industry experts applaud the proposal for highlighting how 401 (k) plans could better address the income needs of retirees.

"Everyone is always talking about how it's too bad that employees always take lump sums out of their 401 (k) plans, but no one is doing anything about it," says Judith Mazo, senior vice president and director of research at the Segal Co. …

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