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TIAA Recommends Getting In-Plan Annuity to Cover Higher Life Expectancy


When it comes to saving for retirement, workers often choose between investing in a popular defined contribution (DC) plan like a 401(k) or an annuity. But the Teachers Insurance and Annuity Association (TIAA) says that you should consider investing in both to pay for the costs of a longer life expectancy. Let’s break down how in-plan annuities work and what you should look out for.

If you are worried about covering the costs of retirement, a financial advisor could help you create a financial plan for your needs and goals. 

TIAA, which provides pension, insurance and investment services for teachers and their families. released a fact sheet for institutional investors in June, calling attention to annuities inside defined contribution plans like 401(k)s as a possible solution for workers who will face higher costs in retirement due to longevity.

“Unbeknownst to most retirement plan participants, annuities inside Defined Contribution (DC) plans, such as 401(k) plans, serve a purpose akin to that of Defined Benefit (DB) plans: They provide the peace of mind that comes with receiving a guaranteed income stream for life in retirement,” TIAA said in a white paper.

The financial institution explains that employers can add annuities to a 401(k) plan investment menu after vetting with financial advisors.

For workers, in-plan annuities could make sense as a way to protect them when they live longer than their plan expectations.

Beginning in 2022, the IRS raised the average life expectancy from 82.4 to 84.6, which means that retirees will have to spread their assets over a longer retirement period. And this is driving both employers and employees to look for solutions.

TIAA references a 2018 survey from the insurance company Aon to show that “80% of employees want some form of guaranteed income in retirement” and over 70% of plan sponsors agree that their DC plans should include “lifetime income options.”

The financial institution says that 63% of American workers in 2020 had qualified retirement assets invested in IRAs and DC plans. And it concludes that the majority of these professionally-managed assets can no longer provide “consistent, predictable lifetime income to last throughout retirement.”

“Now, more than ever, is the right time for plan sponsors to begin exploring how the addition of in-plan, institutionally priced annuity products to their 401(k) plan, as part of a holistic retirement income solution, can help employees retire with the confidence they need to enjoy the lifestyle they’d envisioned for retirement,” TIAA said in the paper.

Understanding How In-Plan Annuities Work

SmartAsset: Should You Add an In-Plan Annuity to Your 401(k)?

Some 401(k) plans allow workers to buy an annuity as an additional option to fund their retirement. For reference, a 2020 survey by the Plan Sponsor Council of America said that just over 16% of all retirement plans offered this income option.

An annuity is a financial contract where you agree to pay a premium to an insurance company in exchange for guaranteed payments at a later date. This is a common option for workers who want to fund their retirement with additional income, specifically those who are worried about outliving their 401(k) or IRA savings.

While annuities can offer many benefits, including delayed taxes on earnings and lower investment risk, this financial product locks in your principal, could charge high fees and can also put you at risk of losing money if you die early.

In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act gave employers more flexibility to add annuities to workplace retirement plans. Workers, however, should note that a “safe harbor” provision in the act can protect plan sponsors from getting sued if the insurance company that offers annuity payments becomes insolvent.

One way retirement plan managers could add an in-plan annuity is by embedding it in target-date funds, which are typically the default investment option in many 401(k) plans.

As workers get closer to retirement age, target-date funds tend to shift from riskier investments like stocks to safer ones like bonds. And plan managers could use this shift near retirement age to gradually invest a percentage in annuity contracts.

Bottom Line

SmartAsset: Should You Add an In-Plan Annuity to Your 401(k)?

Adding an annuity to your 401(k) plan could be a practical solution to pay for a longer retirement. Optional features may also allow you to leave your principal and annuity payments to a beneficiary. However, even if your company offers this option, it does not mean that it is a right fit for your retirement needs. Make sure to review both the benefits and risks before committing. And consult a financial advisor for retirement planning expertise when needed.

Retirement Planning Tips

  • A financial advisor could help you put a retirement plan into action. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re looking for other ways to boost your retirement savings, these four steps will help you maintain and grow your account balances.
  • The most common types of guaranteed income include Social Security and employer-backed pensions. Here are five smart ways to boost and supplement that retirement income.
  • And if you’re falling short on your retirement goals, Vanguard says do this to catch up.

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