Guaranteed income products in workplace retirement plans are a hot topic among employers and workers. With people living longer and worried about running out of money in retirement, as well as recent legislative developments, growing numbers of employers are considering guaranteed income solutions to help workers transform their savings into a lifetime income in retirement. 

Indeed, 81% of employers believe their employees want guaranteed income solutions in their retirement plans at work, according to a recent Nationwide Retirement Institute survey. And employees do want this benefit—a majority of 401(k) participants (75%) are “very” or “somewhat” interested in putting some or all of their workplace savings into a guaranteed income option, according to data from the Employee Benefit Research Institute (EBRI). 

Of course, with any new retirement strategy comes opportunities and risks. Here’s how guaranteed income products are shifting the retirement plan landscape and your responsibilities as a plan sponsor, and what it may mean for you and your participants in the near future.

Why Guaranteed Income?

Life expectancies are longer than ever: The average American can expect to live to around 77 years old, according to the Centers for Disease Control and Prevention. As a result, workers generally need to save more money throughout their careers to last them several decades in retirement. Perhaps not surprisingly, running out of money is among Americans’ biggest fears about retirement. Nationwide found that nearly half (48%) of participants are concerned about outliving their retirement income. 

In addition, most American workers don’t know how to translate a lifetime of savings into a steady stream of income when they retire. Offering guaranteed income solutions in your retirement plan can help make it easier for them by providing regular monthly payments for life. 

This is a departure from the traditional role of retirement plans, which has been to focus on savings and investing strategies to help workers accumulate as much wealth as possible for the future. Where workplace plans have fallen short, however, is in offering solutions and strategies to help workers create a reliable flow of income from their savings to sustain them over the course of 20 or 30 years or more. 

Guaranteed Income Benefits Employers and Employees 

Thus, the appeal of guaranteed income products, such as annuities, is they are designed to help retirees generate a regular income stream while also minimizing their exposure to market risk. In other words, guaranteed income solutions provide retirees an opportunity to create steady, monthly paychecks for life without having to worry about market downturns or spending down their savings too quickly. Some products that are currently available even offer a payout guarantee—such as 5% of the participant’s existing retirement assets at age 65—for life. 

Another upside to offering guaranteed income in your retirement plan is it helps instill more confidence and security, because retirement plan participants are able to easily understand the amount of income they can expect in retirement. This may prompt employees to be more proactive when it comes to saving to reach their goals for the future.

Embracing guaranteed income options has benefits for your company and your bottom line, too. For example, offering these solutions in your plan can help make it more competitive, which may improve your ability to recruit and retain the best and brightest talent. And as employees approach retirement, you may be able to successfully transition them off your payroll because they will feel more confident that they can create the income they need to feel financially secure in their post-career years. This can also result in reduced healthcare costs, which tend to rise as your workforce ages.

While these are all compelling reasons to offer guaranteed income solutions in your retirement plan, there are some drawbacks to consider:

• The decision to elect guaranteed income must be made far in advance of retirement, and can’t be reversed later.
• Participants who don’t live very long in retirement may receive only a handful of payments.
• Payouts may end when the participant dies (depending on the terms of the guaranteed income contract). Generally, however, beneficiaries do not continue to receive payouts, unless the annuity contract specifically includes a death benefit provision.
• While fixed monthly payments generate a predictable income, there is also no upside protection against inflation.

Legislative Implications

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which went into effect in January 2020, made it easier for employers to offer guaranteed income products in retirement plans. Specifically, the legislation implemented a safe harbor that allowed retirement plan sponsors to rely on guidance from state insurance regulators to determine the long-term solvency of guaranteed income product providers, which are usually insurance companies. 

Previously, plan sponsors were responsible for making that determination on their own. Understandably, many were reluctant to take on the responsibility of doing so. However, the safe harbor provision may prompt employers to take another look at guaranteed income solutions and reconsider offering them in their retirement plans. In fact, we are already seeing this happen in many plans.

Additionally, SECURE 2.0, currently under consideration on Capitol Hill, could prompt more employers to consider offering guaranteed income products. The new legislation includes provisions to relax required minimum distribution (RMD) requirements and increase the amount of retirement savings participants can use to purchase certain types of annuity products. 

If you’re considering offering guaranteed income solutions in your retirement plan, you’re not alone. A recent survey found that 60% of employers said they would consider it. 

For a thorough review of your existing retirement plan and potential options available for your participants, contact the WTIA 401(k) team at 401(k)@washingtontechnology.org.