As more companies shift away from offering traditional pension plans, many retired workers challenged with making their savings last a lifetime are doing a poor job of it -- either spending down their assets at an unsustainable rate or underspending to the point they unnecessarily do without things they need.
The Schaumburg, Ill.-based Society of Actuaries and the Stanford Center on Longevity, based in Stanford, Calif., want to set the stage for employers to embrace new ways to help employees plan for a more secure retirement by getting the word out about how they can include lifetime retirement income products in 401(k) plans.
Company retirement plans typically offer a mix of stock and bond mutual funds, and they grow and fall in value depending on market conditions.
"Most employers do not offer income options in company retirement plans, but if they did, it would make a big difference in their workers' retirement security," said Steven Vernon, a consulting research scholar for the Stanford Center on Longevity.
"We see a real problem with retirement plans not having an income option," he said. "We see that as a flaw in the retirement system and we want to help companies correct that flaw. Asking the average worker to know how to take that money [in a 401(k) plan] and make it last is not realistic."
In their joint report, the research organizations describe different ways companies could offer income options in their retirement plans, and they ask employers and plan sponsors to consider the pros and cons of annuities and systematic withdrawals from retirement accounts.
With systematic withdrawals, the employee spends years investing in mutual funds offered within the 401(k) plan and when he or she retires, the individual receives income in the form of dividends and bond interest from the account, as well as from drawing down the principal, with no guarantee that the money will last until the investor dies.
An annuity, on the other hand, is a contract with an insurance company that guarantees the employee a stream of income that will go on as long as he or she lives.
"The problem with annuities is you give up control of your money [after purchasing the annuity]. ... You get an income for life, but you have no control. If you want control of your money, systematic withdrawals would be the better option," Mr. Vernon said.
"If you want a guarantee of income for the rest of your life regardless of what happens to the economy, go with annuities. The problem with systematic withdrawals is you could live too long or the stock market could crash."
A recent 2013 study from Aon Hewitt surveyed more than 400 employers covering 11 million employees, and found less than 40 percent of employers offered installment payment features, which are systematic withdrawals. Thirteen percent of employers offered annuities outside the plan and 10 percent offered in-plan annuities, both of which are retirement income options.
Several major financial institutions offer retirement income products for 401(k) planss, including Vanguard, Prudential, Schwab and Fidelity Investments, Mr. Vernon said.
Two of the biggest barriers for employers and plan sponsors to adding retirement income solutions to 401(k) plans, the report said, are administrative complexity and fiduciary concerns.
The features of the retirement income generators also will vary, depending on risk tolerance, economic optimism or pessimism, life expectancy and self discipline with spending.
"A cultural shift is needed to get employers and plan sponsors to include income options as part of defined contribution plans," said actuary Anna Rappaport, chair of the Society of Actuaries' committee on post-retirement needs and risks.
Tim Grant: email@example.com or 412-263-1591.