By Anne Tergesen
Since the stock market meltdown of 2008, older employees have been clamoring for ways to protect their retirement savings. Now, products with guarantees are starting to make their way into 401(k) retirement plans.
Last week, Prudential Financial Inc. announced that it will make a type of variable annuity available to 401(k) plans that use target-date funds from industry leaders Vanguard and T. Rowe Price.
Since 2008, firms including BlackRock Inc., UBS AG, AllianceBernstein LP, Manulife Financial Corp.’s John Hancock, and Diversified Investment Advisors, a division of insurer Aegon Group, have added insurance-based annuities, which generate steady, guaranteed payouts, to their target-date portfolios.
But because about three-quarters of the assets in target-date funds are invested with Vanguard, T. Rowe Price and Fidelity, the news from Prudential has the potential to greatly expand the number of companies offering annuities to 401(k) participants.
Srinivas Reddy, senior vice president of Institutional Income at Prudential, says the company has yet to sign up its first customer among employers using Vanguard or T. Rowe Price target-date funds. But he predicts it’s only a matter of time before products that offer income protection “go mainstream.”
“I do think you will see more of them offered and accepted in the marketplace,” he says. “A lot of plan participants don’t know what to do. They want some peace of mind.”
There’s a price for that increased safety, of course: Fees run 1% or above what investors pay for the target-date funds themselves. Moreover, there always is the risk, however remote, that any firm backing an annuity could go out of business, potentially leaving investors with less than expected.
In return for that 1% annual fee, investors receive a guaranteed future level of lifetime retirement income. For a 65 year old, the payout rate amounts to 5% of the account’s balance for life. If the account’s value appreciates, the investors periodically have opportunities to lock-in a higher base upon which to take guaranteed withdrawals. And if the account loses value, the amount that’s guaranteed won’t decline. (Investors aren’t locked in while they are still working, so they can access their money at any time or reallocate to other options.)