Adding Annuities May Be Next Frontier In 401k Plans
WASHINGTON, DC, August 6, 2007 -- Faced with the possibility that a growing number of employees will outlive their income in retirement, companies will likely consider offering annuities as a new investment option in their 401k plans, say experts at Watson Wyatt Worldwide, a leading global consulting firm.
"With the baby boomers beginning to retire, we will soon see how the first generation to be more reliant on 401k plans than traditional pensions makes do," said Robyn Credico, national director of Watson Wyatt's defined contribution practice. "Current and future retirees will have to pay more attention to details than previous retirees did. Many will not only find they have not saved enough, but also will struggle with what to do with a lump sum payout they will have to stretch over the rest of their lives."
Unlike traditional pensions, most of which provide a regular payment to retirees, retirement savings in 401k plans are usually distributed as a lump sum. As a result, it is up to retirees to manage their savings. Some purchase annuities on the open market, but the prices for such products are generally quite high and are significantly affected by interest rate fluctuations and other factors.
"Purchasing an annuity adds another level of complication to retirement," said Mark Warshawsky, director of retirement research at Watson Wyatt. "Employees must not only plan out their investment strategies, but also purchase annuities at the right time. Waiting a few months can mean the difference of hundreds of dollars in their monthly annuity income if interest rates change."
As employers consider offering annuities to boost workers' retirement security, many are looking for a broader range of products -- from simple, institutionally priced immediate and deferred annuities at retirement to flexible, portable in-service annuities.
"It's to employers' advantage to help ensure employees have sufficient retirement income. Otherwise, they may see a generation of workers who cannot afford to retire," said Brian Hersey, an investment director and senior consultant with Watson Wyatt. "Having enough to live on and not outliving one's savings are the primary concerns of most retirees. Actively managing lump sums is a huge challenge, even for advanced investors. It is time for the investment industry to step up with a range of institutionally viable solutions to meet these needs."
Watson Wyatt has published a white paper about employer options in offering annuities. The paper can be found at http://www.watsonwyatt.com/annuitiesinDCplans. More information on the volatility of annuity purchases made on the open market can be found at http://www.watsonwyatt.com/us/pubs/insider/annuities.
About Watson Wyatt Investment Consulting
Watson Wyatt Investment Consulting, a division of Watson Wyatt, is focused on creating financial value for institutional investors through independent, best-in-class investment advice. The firm provides coordinated investment strategy advice based on expertise in risk assessment, strategic asset allocation and investment manager selection to some of the world's largest pension funds and institutional investors. It has more than 300 associates in Europe, the Americas and Asia. In the United States, investment advisory and investment consulting services are provided by Watson Wyatt Investment Consulting, Inc., which is a subsidiary of Watson Wyatt Worldwide, Inc. Watson Wyatt Investment Consulting is a registered investment adviser with the Securities and Exchange Commission.
About Watson Wyatt Worldwide
Watson Wyatt (NYSE: WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 6,700 associates in 31 countries and is located on the Web at http://www.watsonwyatt.com.
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