Although 93% of 401(k) participants say it’s important for their plans to provide lifetime income options like annuities, most plans still only offer lump sum distributions. As Carol Buckmann at law firm Cohen & Buckmann explained in her recent article, this disconnect leaves employees vulnerable to one of retirement’s biggest risks—outliving their savings.
Even basic installment options that spread payouts over several years are uncommon. Many retirement plan sponsors seem either afraid of annuities or simply unaware they’re viable options. So what’s holding plan sponsors back, and more importantly, what can be done about it?
For starters, there are too many confusing annuity products out there, each with different features and fee structures. This overwhelms plan advisors, who often throw up their hands and dismiss all annuities instead of helping clients sort through the options. But most participants can’t manage retirement income on their own, and if they buy annuities independently, they’ll likely pay higher fees anyway. The fix is straightforward: Work with qualified professionals to find the right products and stick to simple options like fixed income annuities that guarantee steady annual payments.
Additionally, while recordkeepers love talking up shiny new features like auto-portability or SECURE 2.0 withdrawal options, they rarely bring up lifetime income during plan setup or transitions. They’ll usually just copy whatever distribution options the old plan had without much discussion, Ms. Buckmann noted. Plan sponsors need to ask the right questions—many providers actually offer these options but don’t openly advertise them.
Understandably, plan sponsors also worry about getting sued if something goes wrong with an annuity provider. What if the insurance company goes under? What if they pick the wrong product? These aren’t unreasonable concerns, but SECURE 1.0 changed the game by creating a fiduciary safe harbor with clear guidelines for selecting annuity providers. Combined with professional help, these protections should help sponsors feel much more comfortable moving forward.
The SECURE Acts fixed many of the practical problems that made annuities unattractive in the past. Participants can now get more flexible payment options, including cash refunds and cost-of-living adjustments up to 5% each year. They can also roll over annuity contracts to IRAs or other employer plans when needed, eliminating the penalty risks that used to cause headaches. The catch? Most people don’t know about these improvements yet, which means there’s some serious education work to be done.
Ms. Buckmann also made mention of two things worth watching. First, there are Qualified Longevity Annuity Contracts (QLACs), which let participants set aside up to $200,000 for annuities that don’t start paying until later in life—even as late as age 85. This tackles the “what if I live to 100?” problem. Second, some target date funds and managed accounts now automatically shift money toward annuity purchases as people approach retirement. These funds might even qualify as default investment options, which could be a game-changer.
The solution isn’t rocket science, but it does require some legwork. Plan sponsors should start conversations with their providers about what’s available, get professional help choosing products, and stay on top of new developments. The industry also needs to do its part with simpler products, better education from regulators, and clearer guidance on whether target date funds and managed accounts with lifetime income features can still qualify as default investment options.
The bottom line? Participants want lifetime income options, and the regulatory environment is more supportive than ever. Sponsors that step up to provide these solutions will better serve their employees while potentially reducing their own liability through improved participant outcomes.
