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CCH® PENSION AND BENEFITS — 8/27/07

Adding annuity option to 401(k) plans could help improve retirement security, say Wyatt analysts

Employers are likely to consider offering annuities as a new investment option in their 401(k) plans in order to boost their employees’ retirement security, according to experts at Watson Wyatt Worldwide, a leading global consulting firm.

“With the baby boomers beginning to retire, we will soon see how the first generation to be more reliant on 401(k) plans than traditional pensions makes do,” said Robyn Credico, national director of Watson Wyatt’s defined contribution practice. “Current and future retirees will have to pay more attention to details than previous retirees did. Many will not only find they have not saved enough, but also will struggle with what to do with a lump sum payout they will have to stretch over the rest of their lives.”

Actively managing 401(k) distributions is a “huge” challenge

A participant’s 401(k) plan amount is typically distributed as a lump sum. As a result, it is up to the retirees to manage their savings. “Purchasing an annuity adds another level of complication to retirement,” said Mark Warshawsky, director of retirement research at Watson Wyatt. “Employees must not only plan out their investment strategies, but also purchase annuities at the right time. Waiting a few months can mean the difference of hundreds of dollars in their monthly annuity income if interest rates change.”

Many employers considering offering annuities to their employees are looking for a broader range of products – from simple, institutionally priced immediate and deferred annuities at retirement to flexible, portable in-service annuities.

“It’s to employers’ advantage to help ensure employees have sufficient retirement income. Otherwise, they may see a generation of workers who cannot afford to retire,” said Brian Hersey, an investment director and senior consultant with Watson Wyatt. “Having enough to live on and not outliving one’s savings are the primary concerns of most retirees. Actively managing lump sums is a huge challenge, even for advanced investors. It is time for the investment industry to step up with a range of institutionally viable solutions to meet these needs,” he said.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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