Making 401(k)s Last by Offering Annuities

As the 25th anniversary of the 401(k) approaches in January, plan creator Ted Benna has a lot of concerns.

    Benna, now COO of Malvern Benefits Corp., a 401(k) plan administrator, designed the first such plan for the Johnson Cos. in 1981 to give employees the ability to save money on their own. But as 77 million baby boomers begin to retire, he worries that many of them will not have enough income during their retirement.

    “Making sure the retirees can manage their money into an income stream is going to be a forever issue,” he says.

    Ninety-five percent of employees take lump-sum distributions from their 401(k) accounts when they retire. Instead, employers should educate workers about the benefits of sweeping their savings into an annuity and taking out money over a course of several years to make sure it lasts, says Dallas Salisbury, president of the Employee Benefit Research Institute.

    Unfortunately, most companies are so focused on bottom lines, they aren’t thinking of the long-term effects of retirees running out of money, he says. “Companies have to move away from worrying about what the Wall Street analysts think about them this quarter to doing things to protect their market 10 to 20 years from now,” he says.

    IBM addressed this issue by introducing an online service developed by Hueler Cos., based in Eden Prairie, Minnesota. The service allows employees to plug in their information and receive price quotes for fixed annuities. Benna predicts that more companies will follow IBM’s lead. “When big companies do something, others tend to follow,” he says.

    Motorola and BHP Billiton, an Australian mining resources company, are starting to discuss adding annuity options to their menus. Motorola’s concern about offering an annuity is that employees will think that the company is recommending that they use it and thus could be held liable if an employee loses money in the long run, says Randy Boldt, director of global rewards.

    BHP is addressing the retirement income issues through quarterly educational sessions, says Dan Helman, team leader, retirement services. The sessions include an explanation of what annuities are, but not recommendations of specific products.

    The debate on Social Security reform and the changing demographics of the workforce are bringing this issue onto the radar of employers, but it’s still not a pressing issue for employees. “If you give participants a choice, they will take lump sums every time,” says Michael Weddell, a retirement consultant at Watson Wyatt Worldwide.

    Providers will have to overcome the stigma that comes with the notion of annuities as being high-cost, bad investments, Hueler Cos. president Kelli Hueler says. ” ‘Annuities’ is a very confusing and scary word.”

Workforce Management, August 2005, p. 53 —Subscribe Now!