An annuity option in the investment menu would account for well over a third of needed income in retirement for 401k participants.
A new paper from Prudential Retirement also finds that employers can benefit through improved workforce management and reduced workforce costs.
Titled, “On the Road to Financial Wellness, Lifetime Income Is Key,” it backs previous research that supports what finance executives and plan sponsors increasingly recognize—when employees feel financially secure, they are also less distracted, more engaged and more likely to retire on time.
This “wellness effect” is more likely to happen when employers provide what Prudential refers to as “an all-too-rare but key component to lasting financial wellness—retirement income that is guaranteed for life.”
While a variety of options have been available for some time, in-plan guaranteed lifetime income solutions are not being used as much as they could. Fewer than half of plan sponsors offer a retirement income solution as part of their defined contribution plan—typically a 401k—and only one fifth of those offer a guaranteed income product.
“Best-practice DC plan design incorporating a guaranteed lifetime income solution can be a key to better retirement outcomes and improved financial wellness,” Douglas McIntosh, vice president of Full Service Solutions at Prudential Retirement, said in a statement. “The fear of outliving one’s retirement assets is a top concern for many employees as they contemplate retirement. A guaranteed income solution can help assuage their fears about longevity risk and help them weather market volatility.”
Employers who add a guaranteed income option to their 401ks have the potential to experience positive outcomes, too. it adds.
When employees feel more secure about retirement, they are more likely to retire on time. A 2017 Prudential study found that a one-year increase in average retirement age results in an incremental workforce cost of over $50,000. Also, retirees with lifetime income are much more likely to keep their assets in-plan—helping plan sponsors retain the cost benefits that come with scale.
“It’s understandable why advisors and plan sponsors might have shied away from offering guaranteed income solutions in the past,” McIntosh added. “But the in-plan guaranteed income market has made great strides in terms of transparency and simplification. Also, regulatory bodies have released a succession of guidance and clarifying rulings in support of income solutions within DC plans.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
