Guaranteed Income Does Not Guarantee Retirement Success
I suspect in part as an outgrowth of the stock market meltdown of 2008-09, guaranteed income products (annuities) in 401(k) and other retirement plans are a major topic of discussion. The Treasury Department recently gave the go ahead for the use of annuities in retirement plans. As a practical matter the widespread use of these products is still a bit off into the future.
I wrote an earlier post in this blog and one for US News about my thoughts and concerns surrounding annuities in retirement plans. A good idea in theory, the reality of the implementation concerns me.
Let me focus on one additional area of concern. While a guaranteed income product that the participant would purchase as part of their investment in the plan would provide a guaranteed lifetime income stream, there is no guarantee that this stream of income would be sufficient to guarantee the retirement lifestyle the participant seeks.
Said another way, the inclusion of a guaranteed income option in a retirement plan does not absolve the participant from determining how much they need to save for retirement and how they need to allocate their investments. Even the use of a Target Date Fund or a managed account option requires the participant to ensure that the fund manager is investing their money in a fashion that fits their retirement accumulation needs.
Besides concerns such as the fees tied to these options and the selection and monitoring of an insurance provider for these products, the prospect of these products providing retirement plan participants with a false sense of security in terms of their retirement readiness concerns me greatly. A guaranteed income option might be a good tool for a retirement plan participant, but it is in no way a substitute for good old fashioned financial planning. At the end of the day, participants still need to accumulate a sufficient amount in their retirement plan accounts in order to be able to generate a meaningful monthly income stream if they choose to go the annuity route.
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