Conducted by Oliver Wyman in partnership with Mercer Retirement Consulting, Providing for Secure Retirements: Guaranteed Income as a Qualified Default Investment Alternative says that adding guaranteed lifetime income to a traditional target-date fund or balanced fund can increase a 401(k) participant’s starting retirement income by up to 53% and improve average retirement income by up to 30%.

Risk of Ruin

As the risk of retirement responsibility has shifted from the employer to the employee, plan participants are now faced with the task of ensuring they do not run out of retirement savings, which Genworth calls the “risk of ruin,’ or, the risk of running out of money. Guaranteed income products are one way to protect against this risk, Genworth says.

The study shows that an individual who retires at age 65 and annually withdraws an inflation-adjusted 5% of his or her initial account balance at retirement from a traditional target-date fund stands a 75% chance of running out of money by age 95. (The probability of living to age 95 for an individual who is 65 is 19%. For those who live to be 85, the chance of running out of money is much lower, at 11%, according to the study.)

The guaranteed income strategies in the study were based on Genworth’s ClearCourse Annuitization Benefit, which provides a minimum guaranteed income, and the ClearCourse Withdrawal Benefit, which provides a minimum guaranteed withdrawal and access to the remaining account value at death.

Genworth says the research shows that guaranteed income products allow 401(k) participants to benefit from strong financial markets, while also offering protection against periods of poor market returns.

“The addition of guaranteed income to a QDIA offers plan sponsors the opportunity to provide their participants with the best attributes of a defined benefit plan in a defined contribution vehicle,“ said Fred Conley, President of Genworth’s Institutional Retirement Group. “This solution helps participants to get the best of all worlds – flexibility, growth potential and security – all within one investment choice.’

Choosing a Product

Conley pointed out that there is a good chance plan participants will need help converting assets accumulated into income during the distribution phase, and guaranteed income products will be a part of that.

The study says guaranteed income should be considered as part of a QDIA strategy if participants value:

• increased security that retirement income will not be outlived
• increased income without incurring a risk of ruin
• protection against poorly performing financial markets
• participation in strongly performing financial markets