More Employers Looking at Guaranteed Income for 401(k)s

Today, the challenges Americans face in planning for their retirement are more daunting than they have been in years past. Market conditions have not only made it more difficult to accumulate and save enough money for retirement, but have also increased the burden on investors to generate an adequate stream of lifetime income to account for cost of living increases over the years. In anticipation of this development, however, some 401(k) providers have introduced a new generation of retirement income solutions to help alleviate the stress on investors – and employers are already taking notice of their availability, as well as the aspects that would affect their employees.

In the past, many individuals worked for companies that offered traditional pension plans, which would provide a monthly “paycheck” for life. Of course, these plans are fast disappearing and have been replaced by the most common of defined contribution plans known as a 401(k). Where a pension forced plan sponsors to save for employees and then reward them after a certain period of service with a retirement income stream, a 401(k) throws the burden on the employees to decide how much they need to save, how the money should be invested and how much will be distributed as income in retirement. But until recently, 401(k) sponsors had limited options in terms of protecting employees from severe market conditions.

The new guaranteed income solutions present a more stable flow of income for investors, and some of the more attractive programs offer a guaranteed minimum paycheck every year for life, even if market losses completely deplete the 401(k) account. These programs also offer guaranteed minimum rates of return (most are around 4-6%) during the accumulations years. With the flexibility of these new features, employees gain protection from market downturns while maintaining the opportunity for potential growth from market gains.

Besides the obvious benefits of guaranteed returns and a guaranteed income after a set amount of time, employees gain greater flexibility for estate planning purposes. The features allow for access to principal (which may be more attractive if market gains are favorable) as well as for wealth transfer—where any amount remaining in the account after the retiree dies may be passed to heirs. It should be noted that this is different from an annuity that may stop paying income upon death of the annuitant (party that is qualified to receive the annuity), but similar to traditional 401k assets. The guaranteed income solutions also provide retirees the flexibility to stop their monthly payments at any time, or to use the remaining funds for unforeseen expenses. This allows access to principal with no loss of control.

Plan fiduciaries are cautioned that this feature typically has an increased cost to those employees that use it – typically between 0.30% and 1.00%. Of course, most employees would have happily paid that in light of market performance over the last 12 months. However, if you decide to change providers down the road, you would need to allow those employees the option to keep their money with the existing provider. Otherwise, the employees may find that they paid for a feature they never had an opportunity to use.

Looking back over the last 12 months, many employees trying to retire in 2009 have to face the reality of a depleted 401(k) due to heavy stock market declines. If they had some form of a guaranteed income stream such as these new products offer, they would not have to delay retirement, go back to work, or even deal with the fact that they may have to retire with an income stream that is much less than what they had originally anticipated.

For more information on this topic, please click on the links below:

New 401(k) Feature: Money for Life

Guaranteed Income via Your 401(k)

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Important Notice: Hill, Chesson & Woody does not engage in the practice of law, accounting, or medicine. Therefore, the contents of this communication should not be regarded as a substitute for legal, tax, or medical advice.

June 5, 2009

Hill, Chesson & Woody strives to keep our clients' group decision makers abreast of trends influencing the employee benefits market. Look for Eyes on Benefits to bring you news and information affecting you and your employees.

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