Why employers should include variable annuities in retirement planning
Today, many Americans are facing a challenge when it comes to saving for retirement. With defined-contribution plans becoming the primary retirement savings vehicle, many employees are not able to rely on the guaranteed retirement income like they had in the past. Variable annuities can help solve the problem.
In post-World War II America, the economy was facing massive inflation. At the same time, people’s life expectancies were increasing. This mix of economic and demographic challenges gave rise to a distinct need: How could employers help their employees adequately plan and save for retirement?
The financial services industry recognized this challenge, which led to the development of the first variable annuity to help Americans meet their financial needs throughout retirement.
This annuity enabled people — for the first time ever — to invest retirement funds in equities. Payments were designed to vary based on investment performance so that future income payments had the potential to increase, helping to keep pace with inflation and the rising costs participants might experience in retirement. At the time, an editor from Fortune described this as the “biggest development in the insurance investment business since the passage of the Social Security Act in 1935.”
Adopting a new perspective
Plan sponsors can play a critical role in helping employees address this challenge by offering low-cost investment options on their plan investment menus that can provide lifetime income in retirement. Consider these benefits:
Longevity risk is a big factor when planning for retirement, but annuities, by design, can help mitigate that risk. When combined with other investments as part of a diversified retirement income plan, variable annuities can potentially increase employees’ chances of meeting income needs throughout retirement, regardless of how long retirement lasts.
Variable annuities that are available within a retirement plan can give employees the flexibility to choose when and how much to annuitize — and often at a lower cost than if purchased outside the plan.
Variable annuities can provide options for employees with distinct investment goals or priorities. For example, some variable annuity accounts allow participants to invest in stocks, global equities, bonds and other short- and long-term securities, so they can choose the investment that best meets their needs.
Depending on the type of variable annuity, individuals may receive higher levels of lifetime retirement income compared to regular withdrawal amounts taken from mutual funds with similar investments.
(Annuities do carry risks. The investment return and principal value of a variable annuity will fluctuate so that the investment, when redeemed, may be worth more or less than its original cost. Payments from the variable annuity accounts are not guaranteed and will rise or fall based on investment performance.)
The need for financial security is as important as ever as individuals now face the reality of a longer retirement with even greater financial responsibility. Plan sponsors must consider approaches to solving the retirement income challenge — but they don’t have to start from scratch. For the past 65 years, variable annuities have a legacy of successful outcomes. Plan sponsors can look to investment options like the low-cost, in-plan variable annuity to help employees create an income stream during retirement that will last a lifetime.