Financial professionals who help prepare employees participating in 401(k) plans for retirement face a challenging task: finding a conservative investment option inside the 401(k) that protects participants from outliving their money.   For years financial professionals have been advising clients to maximize their contributions to their company’s 401(k) plan and balance their allocation for highest growth within their risk parameters.  Now, as retirement looms on the horizon, many 401(k) participants must find ways to direct those funds into more conservative investments that generate income throughout retirement.  The reason: traditional approaches lack full reliability to deliver income for life. 

 The insurance industry’s fixed indexed annuity is an answer to meet the retirement income challenge but certain obstacles have prevented its addition to the options within 401(k) plans on an equal footing with traditional investment options like mutual funds.  Thankfully, the barriers to entry have finally been dismantled by a major insurance company’s recent introduction of a Fixed Indexed Annuity exclusively for 401(k) plans.  This annuity allows those approaching retirement and the risk averse to complement traditional 401(k) investment choices by offering a lifetime income guarantee to protect them from outliving their hard earned money.

 Some of the concerns faced by the retirement-minded that can be overcome with Fixed Indexed Annuities include:

  1.  If my current contributions and employer matches continue unchanged, what will be the value of my 401(k) on my planned retirement date?
  2.  How much guaranteed annual income will I get from my 401(k) money on my planned retirement date?
  3. Is this income guaranteed to last as long as I live regardless of market or interest rate changes and regardless of how long I live?
  4. If the stock market falls dramatically as it did in 2000-02 and 2008-09 will my family’s plan for retirement be affected?

 Today’s traditional 401(k) plans have not provided acceptable answers to these important questions because most 401(k) options available to participating employees are investments that move up or down in value as markets and interest rates change.  What’s more, two stock market meltdowns in this millennium, high market volatility and an uncertain global economic landscape highlight the risk of traditional 401(k) investment options.   The potentially safer fixed rate options currently available offer meager growth and no inflation protection. What should a 401(k) plan participant do if they want predictability and income protection?

Today’s Fixed Indexed Annuity is the answer for 401(k) plan participants who are approaching retirement or who are risk averse.  Here are the reasons:

 If contributions and matches continue until the planned retirement date, the roll-up interest rate of this annuity with a guaranteed lifetime income rider makes it possible to know exactly the minimum balance in the annuity’s income account. 

  1. Since both the minimum income account balance and the age of the employee are known on the planned retirement date, the minimum amount of guaranteed lifetime income from the annuity is also known. 
  2. The guaranteed lifetime income continues until the annuity owner dies, even if the account value of the annuity goes to zero.  In addition, the owner has the flexibility of stopping and re-starting the income at any time or withdrawing all or part of the annuity balance in a lump sum.
  3. Until income is elected under the guaranteed lifetime income rider, the annual changes in annuity’s value can only be sideways or up, never down, regardless of market or interest rate changes.

 The Fixed Indexed Annuity exclusively for 401(k) plans is a major improvement that offers those approaching retirement and the risk averse a safe harbor to protect their hard-earned retirement money from market and interest rate uncertainties.  There are other features and benefits of Fixed Indexed Annuities that the retirement-minded will find attractive and cannot currently be obtained from the other options now available in their 401(k) plan.   If your retirement plan does not currently offer the Fixed Indexed Annuity option, I suggest you ask your employer to consider its addition since it will not eliminate any other option now available in your 401(k) but will add important features that appeal to older workers fearful of the market exposure and younger workers who are risk averse or simply wants non-market diversification for their retirement savings.

Shelby J. Smith, Ph.D.

December 2012

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