Are lifetime income guarantees the ‘next big thing’ for 401(k) plans?

Ask employees what worries them most about their 401(k) and you’ll likely hear some variation of this: It’s unstable, and I could lose virtually everything if the market crashes. It’s a reasonable fear.

After all, everybody’s heard at least a few horror stories about somebody losing their entire retirement savings in the Great Recession.

Luckily there’s a new option for defined-contribution (DC) plans that can go a long way toward putting staffers’ minds at ease.

That strategy: in-plan lifetime income guarantees.

2 types of in-plan guarantees

In a nutshell, this vehicle allows DC participants to use some of their retirement plan assets to provide future lifetime guaranteed retirement income while they’re still working.

Participants can use lifetime income guarantees in two ways:

• As a guaranteed lifetime withdrawal benefit, or
• As a deferred-income annuity.

Increasingly, plan sponsors are starting to take advantage of this option. In 2012, DC in-plan guarantee assets totaled $2.2 billion, according to LIMRA research.

More prominent in small plans

Unlike many features added to plans (participant-directed accounts, self-directed brokerage accounts, etc) that are driven by the large plan market, in-plan guarantees are more commonly being adopted by smaller plans.

Here’s LIMRA’s plan breakdown of the 1.8 million participants who have access to an in-plan guarantee:

• 20,300 small plans (less than $10 million in assets)
• 1,200 mid-sized plans ($10 million to $200 million in assets), and
• Fewer than 100 large plans (more than $200 million in assets).

So you may want to talk to your retirement broker about the possibility of adding this option to your plan.