The Retirement Plan Option Less Traveled: 401(k) Annuitization
By Greg Anderson, CMFC®, Member, ADP Strategic Plan Services and Institutional Investment Consultant*
When evaluating your retirement plan, it's important to include an array of options to best help employees reach their retirement savings goals. An increasingly popular option is 401(k) annuitization, which can help benefit workers with guaranteed income during retirement.
A comprehensive retirement plan includes features designed to help employees increase their financial security. But there's one strategic plan option that gets little attention among today's workforce: Annuitization within 401(k) plans.
Annuitization is the process of converting 401(k) funds into a guaranteed stream of income payments during retirement, helping ensure retirees have enough money to sustain a comfortable lifestyle. While an annuity gives employees more investment choices, it can also help plan sponsors create a more attractive and beneficial retirement savings plan.
Improving retirement security
Many older Americans supplement their Social Security income with withdrawals from their retirement accounts, but retirement savings can dwindle over time and may not keep pace with retiree income needs.
While only about 10% of Americans purchase annuities to generate income in retirement, this type of investment offers certain protections that may help address the risk of outliving one's savings. The predictable and quantifiable income stream that certain annuities offer may help retirees clearly identify how much and what money will be available for retirement expenses.
Certain annuities enable employees to convert current savings into a future increase stream and may help employees gain more confidence with respect to their financial readiness for retirement. With a fixed annuity, an individual converts current assets into a guaranteed income stream for a specified period of time.
More options, more satisfied employees
To the extent annuities become popular among investors, because of the income guarantees they may provide, retirement plan sponsors may want to become more familiar with these products should they receive questions from employees about them. New plan enhancements allow eligible participants to convert a portion of their retirement savings into an annuity.
Retirement plan sponsor can take advantage of this new plan enhancement to offer employees the ability to:
- Request annuity quotes from multiple, pre-screened insurance companies
- Receive straightforward comparisons based on the annuity features they selected
- Review educational resources to make informed choices on their annuity options
Plan participants may also benefit from the economies of scale that this wholesale-like method of purchasing an annuity offers. For example, plan participants who purchase an annuity through this program pay a 1% commission on the amount invested which is substantially lower than the fee frequently paid when buying an annuity though more traditional retail channels.
Changing for the better
Research shows that older Americans know little about annuities, netting an average score of 12 out of 100 when surveyed about this financial product. Offering a retirement plan with a broad array of options — including a retirement income solution via an annuity — may help boost overall plan participation and increase satisfaction.
Learn more about annuity plan options and how ADP can help your employees prepare for the next phase. Connect with an ADP retirement planning services specialist or call 844-912-3742.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
Investment options in the "ADP Direct Products" are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 or (in the case of certain investments) ADP, Inc.
*Registered representative of ADP Broker Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 and Associated person of ADP Strategic Plan Services, LLC (SPS) an SEC Registered Investment Adviser. Registration does not imply a certain level of skill or services. M-612069-2024-09-26
