Worker interest rises for employer lifetime-income options in 401(k) plans

Almost all workers who are saving in 401(k) plans say it is important for their retirement plans to provide options for converting savings into guaranteed monthly retirement income that never runs out. And 87% think employers have a responsibility to help them achieve retirement income security.

This is according to a survey of over 2,000 401(k) participants by Nuveen, the investment manager of TIAA, and the TIAA Institute. These findings represent a dramatic increase in interest in guaranteed lifetime income, the survey said. When asked in 2021, fewer than six in 10 workers said that their employers had a responsibility to provide access to lifetime income in retirement.

In fact, the survey found that about 90% of 401(k) participants:

• Think it would be valuable for 401(k) plans to include a fixed annuity.
• Would be interested in saving with a fixed annuity if it were included in their plan.
• Would consider using a fixed annuity to provide steady monthly income throughout retirement.
• Agree it would be valuable for their target-date investments to include a fixed annuity component.

The survey added that today, the typical 401(k) plan does not offer a way to convert savings into a consistent monthly income that is guaranteed for a retiree’s lifetime, despite 401(k) plans being the dominant form of retirement savings in the private sector, with 79 million active participants and $6.8 trillion in assets.¹

Incorporating fixed annuities

In response, innovative 401(k) plan sponsors are exploring how to offer guaranteed retirement income by adding fixed annuities to a retirement plan, the survey said.

“Incorporating fixed annuities into 401(k) plans is a simple, effective and low-cost way to fill the retirement income design gap. With tools like target-date investments that include a fixed annuity component, sponsors can simplify savings and investing, as well as the ability to convert retirement savings into retirement income,” said Brendan McCarthy, head of Retirement Investing at Nuveen. “A well-designed decumulation strategy isn’t just a nice-to-have, it is essential to realizing the full value of a 401(k) plan—and workers agree.”

Why the need for lifetime income is so great

In explaining some of the reasons why many workers desire lifetime income plans, McCarthy said that the retirement crisis is real. Dependable lifetime income has largely disappeared. At the same time, retirees are living longer, and American workers are at risk of running out of money in retirement. In fact, about 45% of Americans risk running short of money in retirement (according to Morningstar).  “As this research clearly shows, workers want access to pension-like lifetime income. We believe lifetime income is becoming a standard part of retirement plan design,” he said.

The research, added McCarthy, shows that participants have clear financial priorities. Among them, the ability to cover unexpected expenses was the most often cited, with 68% rating this as a high priority, followed by "ensuring financial security of surviving spouse or partner," (62%) and "having income that will not fall with financial markets" (59%).

 "Our research shows that workers are overwhelmingly calling on their employers to offer lifetime income in their retirement plans,” added McCarthy. “When asked in 2021, less than six in 10 workers said that their employers had a responsibility to provide access to lifetime income in retirement; however, now a whopping 93% believe it's important for their retirement plans to provide options for converting savings into guaranteed monthly retirement income.”

McCarthy said that for prior generations in corporate America, and for those working in the public sector today, achieving lifetime income in retirement is an expectation that employees have from their employer, even though pensions have largely gone away. In the private sector today, those expectations of income in retirement still exist with a substantial percentage of workers.

The need for effective withdrawal strategies

There is also a need for effective withdrawal strategies, as pointed out by Surya Kolluri, head of the TIAA Institute. “While retirees are increasingly interested in lifetime income solutions, many struggle to develop effective withdrawal strategies," he said. "The challenge lies in converting retirement savings into sustainable monthly income—a process that remains unclear to most participants. This knowledge gap makes education and thoughtful plan design more crucial than ever to prevent potentially costly financial missteps at and during retirement."

Plan sponsors can bridge this gap and boost employees’ retirement confidence, especially for those nearing retirement, by providing focused and regular education programs about retirement benefits and how to convert savings into lifetime income, the survey said.

Incorporating lifetime income options

So, what are some of the methods that can be used to incorporate lifetime-income options in 401(k) plans? “Today’s workers see guaranteed retirement income not just as a personal goal, but as a shared mission with their employer,” explained McCarthy. “By acknowledging that they can play a critical role in offering financial security after retirement, plan sponsors can establish trust and goodwill among employees—potentially for a long time.”

McCarthy added that plan sponsors and consultants are looking for simple and low-cost products that are easy to implement. Incorporating fixed annuities into target-date funds inside 401(k) plans is an effective and low-cost way to fill the retirement-income design gap.

“We like to keep things simple for participants - our strategy has been to take the existing retirement products that participants have become familiar with and enable those investments to offer the option of lifetime income at retirement,” McCarthy said.  “We support these products with an industry-leading participant experience that offers participants the tools and education to understand how their 401k savings will grow and how it can be easily converted into “pension-like” guaranteed income at retirement. With tools like target-date investments that include a fixed annuity component, sponsors can simplify savings and investing, as well as the ability to convert retirement savings into guaranteed retirement income."

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