Retirement savers could start seeing annuities in their 401(k) plans.
While allowing them in workplace retirement savings plans is not new, the 2019 Secure Act aimed to eliminate companies’ fear of legal liability if the annuity provider were to fail or otherwise not meet its obligations.
Now, insurance companies, asset managers and employers are moving toward making these guaranteed lifetime income options more broadly available through 401(k) and other defined contribution plans.
“The Secure Act is definitely the catalyst for the activity we’re seeing now coming from annuity providers as well as retirement plan providers,” said Paul Richman, chief government and political affairs officer at the Insured Retirement Institute.
“Come 2022, you’re going to really start seeing these in retirement plans,” Richman said.
The general goal is to address concerns that retirees won’t have enough income to cover their expenses over the course of their golden years. Roughly half of retirement savers worry they’ll outlive their savings, and 42% worry about covering daily living expenses when they retire, according to a January survey by SimplyWise.
A man reaching age 65 today can expect to live, on average, until age 84, according to the Social Security Administration. For a woman, the average age is 86.6. About a third of all 65-year-olds today will live past age 90, with about 1 in 7 living beyond age 95.
Annuities generally involve entering into a contract with a provider (typically an insurance company), whereby you hand over your money in exchange for the promise that you’ll receive regular payments across many years (or decades). Yet they can be tricky to understand and, depending on the type, pricier than other options for your money.
However, generally speaking, annuities in your 401(k) may look different from those purchased outside of the plan.
For instance, at BlackRock — which is among the first investment managers pushing to get annuities in the hands of 401(k) plan savers — a guaranteed income option will be embedded in target-date funds. Those funds, which are used widely in 401(k) plans and are the typical default option, gradually move away from stocks and toward safer investments like bonds as you near retirement age.
As part of that gradual shift in investments, BlackRock’s funds will begin allotting about 10% to annuity contracts when you reach age 55. That share will grow to 30% by the time you reach 65.
“It’s an asset class within the target-date fund,” said Nick Nefouse, a managing director at BlackRock who heads up the company’s target date funds franchise.
In other words, you are not actually buying annuities by investing in the target-date fund that will hold those contracts, Nefouse said. “You are buying the option to purchase guaranteed income,” he said.
That is, any time between age 59½ and age 72, you would have the option to roll over that portion into a fixed annuity offered by BlackRock’s insurance partners (Brighthouse Financial and Equitable). Fixed annuities generally provide a minimum guaranteed rate of return on your principal.
For example, if a 65-year-old male were to use $100,000 to purchase a fixed annuity to start paying out immediately, he would get about $487 per month for the rest of his life, or $5,844 per year, according to Schwab’s annuity calculator.
The annual cost of BlackRock’s new target-date fund would start out as 0.1% off your balance and rise modestly once the annuity slice is added. However, eventually moving that portion to a fixed annuity would come with no cost due to the elimination of commissions and other fees, Nefouse said.
Five plan sponsors are expected to implement the new product, which should be available in 2022, according to BlackRock. J.P. Morgan Asset Management also has indicated it plans to partner with insurer AIG to help 401(k) participants get into annuities. Other insurance companies — including Allianz and Nationwide — are launching their own options that plans could incorporate.
It’s worth noting that although BlackRock’s offering will eliminate the middleman — and thus commissions or other sales charges — it doesn’t mean all annuity options in 401(k) plans will operate the same way. And, the Secure Act did not put limitations on the types of annuities that could be offered through a plan, Richman said.
With traditional pensions going by the wayside, interest in annuities among 401(k) participants appears to run high: About 75% of them say they are interested — either very or somewhat — in putting some or all of their workplace savings in a guaranteed-income option, according to a report from the Employee Benefit Research Institute.
“Clearly the desire is out there and people are thinking about protecting their retirement savings so they don’t outlive their savings,” Richman said. “As plans include more annuities as options, and participants get educated, they’ll see the benefits of it.”