Enhancing 401(k) Plans: Flexibility and Annuities for Retirees

As a growing number of Americans reach retirement age daily, companies are adapting their 401(k) plans to better serve retirees transitioning from asset accumulation to income distribution. Increasingly, plans offer enhanced flexibility in withdrawals and annuity options to address retirees' desire for guaranteed income streams. Retaining retirees' savings within employer plans benefits both administrators and participants by lowering costs through economies of scale, particularly as retirees often maintain substantial account balances. Despite the option to roll over funds to IRAs, many retirees remain unaware they can leave assets in their 401(k) plans post-retirement. Most plans permit this, though small account balances under certain thresholds are usually distributed or rolled into IRAs. Payout features such as installment payments and partial cash distributions have become more common but often come with restrictions on withdrawal frequency and the composition of assets sold. The inclusion of annuities within 401(k) offerings has advanced following legislative protections under the Secure Act of 2019, which alleviated fiduciary concerns about choosing annuity providers. Nevertheless, adoption remains limited, and annuitization is not automatic, requiring active participant decisions. Annuity-enhanced target-date funds represent a novel approach to integrating guaranteed income options but account for a minimal proportion of retirement assets. The shift from defined benefit pensions to defined contribution plans like 401(k)s has heightened the importance of retirement income strategies. Older workers, many acting as self-directed investors with higher average balances, face complex choices about managing longevity risk and income certainty. The growing market demand for guaranteed income illustrates evolving retirement planning challenges and opens avenues for insurers and plan providers to innovate.