This 401(k) move before you retire guarantees monthly income in old age (via Pozen)
In an unusual bipartisan effort, Congress is close to passing the SECURE Act . In a key provision, the Act encourages employers sponsoring 401 plans to offer retirees the chance to convert their plan balances into annuities with monthly payments for the rest of their lives.
Yet, despite the benefits, retirees are reluctant to convert their retirement savings into annuities. This article reviews the three main arguments against annuities and suggests strategic responses by plan sponsors to these arguments. Unless plan sponsors implement these strategies, the Act will not lead to a substantial increase in the take-up of retirement annuities.
To avoid these problems, plan sponsors should find a low-cost source of annuities and arrange for direct purchases from that insurance company — without the deployment of a sales force. Instead, the plan sponsor could provide retiring participants with seminars, which would objectively review the pros and cons of annuities. Importantly, the plan sponsor should work with the insurer to offer a simple form of a fixed annuity, with pre-set monthly payments for the life of retirees .
Third, retirees have different expectations about how long they will live — which materially influence their receptivity to annuities. Some retirees are concerned about their near-term mortality, due to current illnesses or adverse genetics, so they will be reluctant to buy a stream of monthly payments based on average life expectancy. Other retirees are worried primarily about outliving their savings.
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