Adding annuities may be next frontier in 401(k) plans

Faced with the possibility that a growing number of employees will outlive their income in retirement, companies will likely consider offering annuities as a new investment option in their 401(k) plans, say experts at Watson Wyatt Worldwide, a leading global consulting firm.

"With the baby boomers beginning to retire, we will soon see how the first generation to be more reliant on 401(k) plans than traditional pensions makes do," said Robyn Credico, national director of Watson Wyatt's defined contribution practice. "Current and future retirees will have to pay more attention to details than previous retirees did. Many will not only find they have not saved enough, but also will struggle with what to do with a lump sum payout they will have to stretch over the rest of their lives."

Unlike traditional pensions, most of which provide a regular payment to retirees, retirement savings in 401(k) plans are usually distributed as a lump sum. As a result, it is up to retirees to manage their savings. Some purchase annuities on the open market, but the prices for such products are generally quite high and are significantly affected by interest rate fluctuations and other factors.

"Purchasing an annuity adds another level of complication to retirement," said Mark Warshawsky, director of retirement research at Watson Wyatt. "Employees must not only plan out their investment strategies, but also purchase annuities at the right time. Waiting a few months can mean the difference of hundreds of dollars in their monthly annuity income if interest rates change."

As employers consider offering annuities to boost workers' retirement security, many are looking for a broader range of products -- from simple, institutionally priced immediate and deferred annuities at retirement to flexible, portable in-service annuities.

"It's to employers' advantage to help ensure employees have sufficient retirement income. Otherwise, they may see a generation of workers who cannot afford to retire," said Brian Hersey, an investment director and senior consultant with Watson Wyatt. "Having enough to live on and not outliving one's savings are the primary concerns of most retirees. Actively managing lump sums is a huge challenge, even for advanced investors. It is time for the investment industry to step up with a range of institutionally viable solutions to meet these needs."

Watson Wyatt has published additional information on the volatility of annuity purchases made on the open market.

You may like these other stories...

In the tax world, as in the real world, there is often a "right way" and a "wrong way" to do things. This is particularly true concerning rollovers from a qualified retirement plan, like a 401(k) or...
Read more from Daniel Mazzola here.Most people – maybe even most accountants – think of Social Security as just a government retirement plan. But perhaps just as important are the survivor benefits, the payments...
When Theodore J. Flynn first joined the Massachusetts Society of CPAs (MSCPA) in 1970, it was a different world and a different profession.  The "Big Eight" were still headquartered in Boston. Vietnam War...

Upcoming CPE Webinars

Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.
Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.