A 401(k) With Lifetime Income That Never Runs Out

A clock is on one end of a balanced seesaw, and money is on the other.

(Image credit: Getty Images)

Many 401(k) participants want a retirement plan that provides options for converting savings into guaranteed monthly income, but few plans offer such a choice.

Having the option of converting workplace retirement plan savings into lifetime income is essential, according to 93% of 401(k) holders surveyed by Nuveen, the investment manager of TIAA, and the TIAA Institute. The SECURE Act and SECURE 2.0 allow for 401(k) plans to offer lifetime income options, although few employers offer them.

Employers have a responsibility to help employees achieve financial stability, according to 87% of respondents. The majority of participants consider fixed annuities to be a valuable addition to 401(k)s. Other findings include:

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Employees would be interested in saving with a fixed annuity if it were offered.
Employees would consider using a fixed annuity to provide steady monthly income throughout retirement.

What is a fixed annuity?

A fixed annuity is a financial contract between an individual and an insurance company, which essentially provides an individual with a guaranteed stream of income in retirement.

This is how it works: An employee makes one lump sum payment or a series of payments to the insurer. In return, the insurer promises to make regular payments to the employee for a specified period or life. The payments are not subject to market fluctuations, and earnings grow tax-deferred until the employee starts making withdrawals.

So, why are annuities a valuable addition to 401(k) plans? Fixed annuities can provide a pension-like income stream, addressing workers' concerns about outliving their retirement savings and ensuring a stable income.

“The retirement crisis is real,” says Brendan McCarthy, head of Retirement Investing at Nuveen. “Dependable lifetime income has largely disappeared. At the same time, retirees are living longer, and American workers are at risk of running out of money in retirement."

He noted that roughly 45% of workers risk running out of money in retirement, according to Morningstar.

"As this research clearly shows, workers want access to pension-like lifetime income," says McCarthy. "We believe lifetime income is becoming a standard part of retirement plan design.”

Even though 401(k)s dominate private-sector retirement savings, with 79 million active participants, they don’t offer a way to convert savings into ongoing monthly income that is guaranteed for life. As a result, the most creative plan sponsors are exploring how to add fixed annuities to retirement plans to support the need for guaranteed income for life.

A remarkable 85% of sponsors say they feel that workers need additional sources of guaranteed lifetime income beyond Social Security, and 59% point to Social Security's uncertain future as the key reason to add or consider adding annuities to defined contribution retirement plans. They also highlight that growing acceptance by other employers (52%) and shifting demographics, such as increased life expectancy (48%), are driving significant change.

Christopher Stickrod, head of Retirement Product at TIAA, adds, “One of the most striking aspects of this research is the generational divide: younger workers are even more adamant about employer involvement in retirement security. The message couldn't be clearer. They want guaranteed lifetime income options in their 401(k) plans, and they are ready to use them."

The need to act now

If an average of $1.26 million is needed for a comfortable retirement, according to recent reports, that leaves many Americans short of the goal.

Many retirees worry they may outlive their savings. Adding guaranteed lifetime income options to workers’ 401(k) plans is one practical and much-needed solution. Stickrod stresses, “The question now isn't whether to offer these solutions — it's how quickly we can implement them.”

For the past 18+ years, Kathryn has highlighted the humanity in personal finance by shaping stories that identify the opportunities and obstacles in managing a person's finances. All the same, she’ll jump on other equally important topics if needed. Kathryn graduated with a degree in Journalism and lives in Duluth, Minnesota. She joined Kiplinger in 2023 as a contributor.