Should There Be a Larger Role for Annuities in Your 401(k)?

A recent feature by Anne Tergesen in the Wall Street Journal showcases several proposals for the future of 401(k) retirement plans. Originally intended as a supplement to pension plans, a 401(k) plan now tends to serve as the main source of retirement income for most people. Unfortunately, those people with the bad fortune to retire in a slumping stock market (like the current situation) are in danger of retiring in poverty.

Brookings Institution senior fellows Mark Iwry, Lina Walker, and William Gale, with the Heritage Foundation’s David John suggest a greater role for annuities in 401(k) retirement plans. To promote the increased utilization of annuity products, they propose an opportunity to “test drive” an annuity, where employers would automatically convert part of their retirement account balance into an annuity for two years after they retire, unless the employee opts out. Employees will then have another opportunity to opt out of the annuity after the trial period ends, or keep the annuity for life.

Although an annuity would convert a lump sum into a stream of income that would provide some level of stability for retired seniors, annuities don’t appear to be very popular with consumers. In Tergesen’s article, she claims that only 3% of individuals whose 401(k) plans offer them choose to take an annuity option. A preview of sorts, such as the one described above, could improve the reputation of annuities and open more consumers to their benefits.

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