401(k) Annuities: An Idea Whose Time Has Come?

A chance for ‘peace of mind’

Brent Walder, a senior vice president at Prudential Retirement, which administers defined contribution plans with lifetime guaranteed income options for 187 employers, says this relatively new approach to retirement plans is what boomers and other workers want for their “peace of mind.”

He says Prudential’s lifetime guaranteed income options are linked to target-date funds—investments that automatically become more conservative over time as plan holders approach retirement. The fees are slightly higher than those of other retirement options. The cost for the investment management is between 0.5 and 0.75 percent, and the cost for the guaranteed income option, which doesn't kick in until 10 years before the fund's target retirement date, is an additional 1 percent.

The appeal is that the annual income is guaranteed. “Let’s say you have a $100,000 balance and you [get] $5,000 a year for as long as you live,” Walder says. “That $100,000 is still invested and could grow or drop depending on the market. If your portfolio balance goes up, you get a higher income stream. If the market doesn’t do well and your balance goes to zero, you’re still guaranteed that $5,000 a year.”

With people living longer today, low-cost options to annuitize 401(k) accounts “should be readily available and promoted to ensure an income stream throughout retirement,” says Dave Certner, AARP’s legal policy director.

But he adds that annuities may not be the right choice for every retiree, particularly those who have smaller 401(k) account balances or who already have a large amount of annuitized income like pensions. He also says workers and employers must be wary of excessive fees.

For Ron Baker, 70, investing his entire 401(k) balance into an annuity was the “best decision I ever made.” He retired two years ago as a sales representative for an insulation manufacturer in Louisiana.

“Everything has been exactly as represented,” he says. “Even though the value of my portfolio dropped with the market in 2008, I was still paid on the amount I rolled over” into an annuity.

“The nice part is that it’s guaranteed for life. If I invested it someplace else and I wasn’t protected, I’d get less on a lesser amount,” he adds. “Between this income and Social Security, my lifestyle hasn’t changed whatsoever.”

Carole Fleck is a senior editor at the AARP Bulletin.