Over the past 40 years, 401(k)s have replaced pensions. Now, some asset managers are trying to make these retirement savings plans function more like pensions.
From 1980 to 2022, the participation rate of private industry workers will be Defined benefit benefit According to , the pension plan fell from 38% to 15%. Bureau of Labor Statistics. The worker is instead told to contribute to his 401(k) plan for a secure retirement, and most people with access to the plan actually contribute.
An even bigger challenge is what to do with these assets after retirement. Pensions have given retirees predictability, a guaranteed source of income, and an easy way to know how much they can spend.Social Security benefits provide lifetime income, but it’s just 30% of income For people over 65 years old.
With longer life expectancies and unpredictable market returns, many baby boomers are “feeling anxious about retirement,” said Jason Fichtner, director of the Retirement Income Institute. “They’re looking at these market cycles and asking, can they really afford to retire? How can they make sure that it lasts for what could be 30 years?”
Some asset managers and retirement plan sponsors are trying to answer that question by including guaranteed lifetime income options in defined contribution plans.
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“We’re trying to replace that pension income,” Fichtner said.
Demographic trends make this issue particularly salient today. The U.S. population aged 65 and older grew nearly five times faster than the total population between 1920 and 2020. Americans are confident that they can live comfortably. Retirement allowance decreased,on the other hand, Median retirement account value For people between the ages of 55 and 64, it was just $185,000 in 2022.
Guaranteed income with a 401(k)
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One of the catalysts for increased lifetime income is the 2019 SECURE Act, which made it easier for employer 401(k)s and other plans to offer guaranteed income options offered by life insurance companies. .
“Recent changes in the market environment are exacerbating that trend,” said Brendan Curran, head of Americas defined contribution at State Street Global Advisors. The company plans to begin offering its IncomeWise product in 2025, an index-based target-date fund with the option for participants to turn their savings into lifetime income.
State Street declined to say what the payout ratio will be for future products. But you can get a rough idea of pricing by visiting sites like immediateannuities.com, which sells income annuities to the public. Suppose you are a 65 year old single woman who has her $100,000 in her 401(k). Purchasing an annuity from an insurance company with the best credit rating can give her more than $600 a month for the rest of her life.
Fidelity plans to expand its existing lifetime income product in 2024, which allows employees to convert a portion of their 401(k) savings into a guaranteed lifetime income by purchasing an annuity.black rock
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LifePath Paycheck is a target date fund that offers similar options to participants. So far, 14 major plan sponsors are implementing the strategy in their 401(k) plans, a BlackRock spokesperson said.
TIAA, which manages funds for nonprofit organizations and their employees, has long offered pension options within 403(b) plans. In August, TIAA-owned asset management company Nuveen launched a similar product for 401(k)s, fixed-income annuities built into target-date funds, called the Nuveen Lifecycle Income Series.
“We’re seeing incredible demand and growth for target date products that incorporate fixed income annuities,” said Brendan McCarthy, head of retirement investments at Nuveen.
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higher pension payments
Some strategists expect interest rates to remain high for an extended period of time, reducing overall market returns as the Federal Reserve continues to fight inflation. A traditional 60/40 portfolio may not return as much over the next 10 years as it did in the decade that ended in 2021, says AllianceBernstein’s U.S. Multi-Asset Solutions division, which provides clients with goals. said Chris Nikolic, Head of Glide Path Strategy. – Date fund with annuity option.
“In addition to a balanced portfolio, specific pension plans can effectively meet the needs of many individuals,” Nikolic says. “This provides vital retirement income security, but without having to part with assets or give up growth potential.”
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Additionally, because annuity payments are primarily based on interest rates and life expectancy, rising interest rates have increased annuity payment rates. “In the fixed deferred annuity market, payout rates are 80% higher than they were two years ago,” said State Street’s Curran.
Don’t call it a pension
Pension sales are woke up It’s been a year now, but it still has a bad reputation. Many consumers consider them overly complex investments with high fees and low liquidity. Pensions offered through retirement plans are easy to understand and have low fees, Fichtner said.
“If you ask someone, do you want a paycheck for the rest of your life? The answer is yes. Do you want to make sure you don’t outlive your savings? Yes. Would you buy an annuity? They say no,” says Fichtner. he says.
However, Fichtner’s research found that nearly twice as many participants prefer a retirement plan that combines investments and lifetime income to one that uses only investments or only annuities to generate retirement income. did.
“Workers value knowing how much money they can safely spend more than any other feature of a retirement savings plan,” he writes.
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