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Low Cost Annuity Options Beat 401k Plans, According to TIAA-CREF’s CEO

TIAA-CREF’s CEO, Roger Ferguson, says that low cost annuities are better in many ways than 401k’s. The company provides retirement services to more than 5 million people at different types of nonprofit organizations. He believes that annuities are the solution to America’s retirement crisis because employees need a guaranteed income source when they stop working. In “Tips for Retirement Saving from TIAA-CREF’S Roger Ferguson,” an article for Bloomberg Businessweek, Carol Hymowitz interviewed Mr. Ferguson about annuity products and America’s retirement outlook.

She first asked him to describe how TIAA-CREF’s retirement plans are different from traditional 401k plans at for profit companies. 401k’s were introduced as savings plans and have remained that way for the most part. But TIAA-CREF’s plans are retirement plans so they give you the option to roll your savings into an annuity that will guarantee you a lifetime stream of retirement income. While some 401k plans are well diversified and offer low cost investment options, unlike TIAA-CREF’s retirement plans, not all 401k plans offer those things. Recently, some 401k plans have started offering annuity choices as well, but it is a new option and Mr. Ferguson said that Americans need more low cost annuity choices in their retirement plans.

The bottom line is that Americans are not saving enough. TIAA-CREF works with its universities and other organizations on simple solutions to help workers save more. Many organizations have automatic enrollment in their retirement plans, which makes for higher participation rates. They also offer auto-escalation for both employee contributions and employer matches, so that you save more as you make more money. While many non profit employees are lucky to have 100% employer matching, that doesn’t hold true for every organization, so employees have to work to save even more.

Mr. Ferguson said that there is a big issue in America as 10,000 Baby Boomers turn 65 every day. People simply have not saved enough and are hoping to rely on Social Security as their main retirement income. But the average Social Security benefit might only cover your medical costs, which are significantly increasing every year. Our current idea of retirement is likely to change drastically over the next five years as people work longer and struggle to create a retirement income source. The article also points out that increasing education is the best way to get younger people to save more. Millennials want to hear from people their own age and they prefer to learn from blogs or videos. They also tend to listen more during big life events like a wedding or the birth of a child.

The author asked Mr. Ferguson if he thought that TIAA-CREF should be the model for creating retirement savings in America. He was quick to point out that no one system will work across the board, but said that many aspects of their retirement plans could also be a prototype for other organizations that are for profit rather than non profit. The things that could be modeled elsewhere include low cost annuity options, auto-enrollment and escalation features and well diversified investments. Contact an expert at Annuity FYI if you have any questions about using annuities to create a guaranteed lifetime stream of income from your retirement plan.

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