Opinion: Fidelity 401(k) plan coming soon: annuity

This is part of a growing trend, after SAFETY Act 2019, which helps employers provide legally safer annuities.

“Moving from saving for retirement to living in retirement is one of the biggest transitions a person will make in their lifetime, and one of the top challenges individuals face in the process. this transition is about making sure they have enough predictable income to cover their essential expenses,” said Keri Dogan, senior vice president of Fidelity’s Retirement Solutions division, said in a statement.

This news is both less and more than the eye. Investors had the option to roll some or all of their 401(k) or 403(b) balance into an annuity when they retired. But including annual payments as part of a plan can add up. Including annuities in plans also makes them look like traditional pensions. In the past, before the rise of “determined contribution” plans such as 401(k), 403(b) and 457, workers paid a pension while they were working and then received a fixed income for life when they retire.

In theory, annuities are at least a great product for retirees. They allow you to turn some money into guaranteed income for life. They are offered by insurance companies and the main benefit is that you are insured against the risk that you will outlive your money, known as “lifetime risk”. The person who buys the annuity and then dies quickly subsidizes the person who lives to 110 years old; just like, for example, with fire insurance, the person who pays the premium and the house that doesn’t burn down ultimately subsidizes the person who has that home.

The biggest difference, of course, is that with subsidies, the unlucky person subsidizes the lucky one, not vice versa. But at least you avoid the risk of spending all your money.

Economists have long wondering on why many people don’t buy annuities, at least with a portion of their retirement savings, when they retire. One reason, they discovered, is that many people don’t want to drop a lump sum of money in exchange for a stream of cash. For some reason, a cash flow seems less valuable. Another reason could be that they don’t want to bet where the losers of the game of immortality will subsidize the winners. Another may be the desire to leave money to their children and grandchildren.

But there’s also the annoying fact that payments crash.

The annual payments are based on the interest rate on the corporate bond, since that’s where the insurance company invests the premium. And the collapse in bond yields, or yields, in recent decades has made annuities appear less attractive than they once were. According to the Annuity Shopper, the industry bible, a 65-year-old who purchases a lifetime instant annuity today will receive half the monthly income they would have had 30 years ago.

The risk is always that you will pour money into your account every year today only to accumulate it for the next 20 years when inflation soars.

There is no perfect solution, although being cautious with annuities does not mean avoiding them altogether. The main five inflation protections offered today are Social Security.

Maybe if the government completes its Social Security fix, it could consider helping retirees by providing inflation-adjusted annuities directly. In other words, under certain circumstances, I may want to invest more in Social Security when I retire to receive higher benefits.