Senior shocked by money

You May Soon Be Able to Swap Your 401(k) for a Lifelong Monthly Check

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Annuities may be coming to your 401(k). Last month, Fidelity Investments rolled out its Guaranteed Income Direct platform, an option that can turn part or all of your retirement savings into a stream of predictable monthly payments for life — all without leaving your 401(k) account.

This is an emerging trend, and retirement savers can expect to see more plan providers offering similar options, which add an important income component to your plan, experts say.

“The issue with 401(k) plans is that they were designed for retirement income, but most companies only offered investing strategies,” says Wade Pfau, co-director of the Retirement Income Center at The American College of Financial Services. “So it’s great to see they now are increasingly having annuity options or other kinds of ways to implement a retirement strategy.”

Guaranteed Income Direct allows employers that use the plan administration company’s services to select immediate income annuities from insurers of their choice.

Participants also get access to Fidelity’s digital tools and retirement-income educational resources. Nearly 8 million workers nearing retirement have their 401(k) through Fidelity, but their employer must choose the annuity option in order for it to be available to them.

With inflation dominating the headlines, many people close to retirement fear they may outlive their savings. Here’s how an annuity can help.

How many 401(k) plans offer annuities?

Back in January 2020, only 10% of employers offered annuities as part of their 401(k) plan. Yet according to Fidelity, more than 78% of workers are interested in putting some of their retirement savings into an investment option that guarantees monthly income.

One of the reasons why employers have been hesitant to offer annuities is risk. Sixty percent of employers said they didn’t offer annuities out of fear that they’d be held legally accountable if the insurance company offering the annuities went under, according to a 2020 study by the benefits consulting and insurance firm Willis Towers Watson.

However, the SECURE Act of 2020 eased some of the burden on employers, and experts’ prediction that more 401(k)s would soon include an annuity option has come to pass.

Why consider an annuity to fund retirement

No matter how carefully you plan your retirement, you won’t know how long you’ll need to live off your retirement savings. For planning purposes, it’s safe to take a conservative view and assume you’ll live well into your 90s.

But there’s always the chance that your retirement investments won’t generate enough income to live the retirement you deserve.

So if that’s one of your major concerns, you may consider an annuity. With an annuity, an insurance company turns a lump sum of your savings into guaranteed monthly payments. This gives you peace of mind, since you don’t need to worry about depleting your nest egg or seeing your assets depreciate during market downturns.

Historically one of consumers’ objections to annuities has been: What if you buy it and die soon after? Do you lose your investment?

Many annuity providers offer a solution to this. They let you name a beneficiary for your annuity. That means that if you die, your beneficiary receives the stream of payments. But specifics such as payment amounts may vary across providers. So it’s important to speak with your plan sponsor about how these benefits work.

Fidelity is offering the most straightforward form of annuities, which are income annuities. Employees have the option of an immediate fixed income annuity that provides guaranteed lifetime income with benefits that can start immediately after purchase and the option to name a beneficiary.

How much annuity income should you buy?

If you’ve decided to buy an annuity, Pfau has a tip for figuring out how much you’ll need: Start by looking at the expenses within your budget. Then, aim to cover necessities like housing, utilities and food with guaranteed income sources including pensions, Social Security benefits, annuities, etc.

Using the Charles Schwab Income Annuity Estimator, we found that a 65-year-old New Yorker can turn $100,000 into $483 a month for life through an immediate annuity.

Through Fidelity, you don’t need to invest all your savings in an annuity. You can also keep part of your savings invested in stocks, mutual funds and other assets that seek growth.

Correction: A previous version of this story misstated that Fidelity’s Guaranteed Income Direct platform offers immediate fixed income annuities with a cost-of-living adjustment, as well as deferred income annuities with a Qualified Longevity Annuity Contract. The new Guaranteed Income Direct platform offers only immediate income annuities at this time. In addition, the previous version said 8 million workers have their 401(k)s with Fidelity, whereas that number refers specifically to those nearing retirement on Fidelity’s workplace savings platform.

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