Perspective: Guaranteed Lifetime Payments

A New Look at the Importance of Income Replacement 

Whether implementing, administering or participating in a workplace retirement plan, the emphasis all too often is on “accumulation” and helping employees build up assets during their eligible contribution years.

To be sure, amassing a sufficient nest egg is an important objective of 401(k) plans, as well as their 403(b) and 457 counterparts. And for most Americans today, the amount they set aside in a workplace retirement account represents their single largest asset. However, asset accumulation isn’t the only part of a sound financial plan. Furthermore, many employees don’t know how those funds should be distributed once they reach retirement age and withdraw their money.

Financial advisers have a unique opportunity today to consult and advise employees on their plan distribution options well before retirement. Historically, most defined benefit plans offered members the option of selecting an annuity or an alternative form of guaranteed lifetime payment. However, that has not been the case within the defined contribution landscape, which has expanded considerably over the past three decades.

In fact, most 401(k) plans do not offer payout methods other than taking a lump sum. The primary reason is that plan sponsors don’t want to worry about satisfying the rigorous fiduciary obligation of selecting an annuity provider. Sponsors also avoid the administrative burden of obtaining spousal consents, which are required when offering lifetime payment options.

Yet during the downturn of 2008-09, many plan participants, especially those nearing retirement, learned the hard way that lump sum investments are subject to volatile market swings without any guarantees or protections. In the aftermath, a renewed interest has emerged in generating a guaranteed replacement for one’s paycheck during retirement. So what is being done to help millions of working Americans better understand and access these opportunities while they are still in plan?

Our nation’s policymakers have recently launched two initiatives to increase the awareness and use of lifetime guaranteed payments. First, a bill is currently in Congress that would require sponsors to provide participants with an annual statement showing what the current value of their accumulated savings would be if translated into a monthly annuity at retirement age. The purchase rates for the annuitized amount would be provided by a table published by the Department of Labor.


The hope of those backing this initiative is that participants would become more aware of how much they will have on an ongoing basis during retirement – and how long those savings would last. After factoring in Social Security and other sources of retirement benefits and savings, employees would then be able to plan accordingly. In many cases, they might recognize the need to modify their strategy much earlier in the savings process.

A second initiative is being undertaken jointly by the Departments of Labor and Treasury, which recently conducted a request for information (RFI) from providers, financial experts and the public at large. Their goal is learn how the financial security of Americans can be improved by encouraging greater use of guaranteed lifetime income options, especially within the framework of a workplace retirement plan. The agencies will be evaluating this information with an eye towards current laws, regulations and plan practices that inhibit these offerings from being more attractive to employers and participants.

While the government is just starting their process, advisers need not wait to counsel clients about lifetime payment options. A few helpful tips can get participants thinking in the right direction, well before they reach retirement:

  • A first step is to review a client’s needs and leverage one of the many retirement income calculators that are available for these purposes. Do they have sufficient savings and resources to meet their lifestyle objectives? Is there a gap to be filled? Is there a risk of outliving their savings? Would securing a guaranteed income stream be a good idea?
  • Next, identify the options in the employer’s retirement plan. If a lifetime guaranteed payment is not available to your client, then purchasing a separate annuity product from an insurance provider might be the right answer.
  • Third, if the plan does not offer lifetime guaranteed payments, an adviser can support a client’s interests even further. Supplying a list of reasons to give their benefits department – such as the avoidance of employee dissatisfaction – may help persuade that employer to consider offering this as an important plan option.

No matter what action is taken, the real key is to start the process early. Discovering a shortfall for your client sooner than later will better prepare them for their future – and demonstrate your value as they work towards achieving a positive retirement outcome.


Robert M. Kaplan, CFP, CPC, QPA, APA, is Vice President and National Training Consultant for ING’s U.S. Retirement Services. In this role, he leverages his 30 years of experience in the retirement industry to help educate a variety of ING stakeholders on complex regulatory topics, plan design matters, administration and sales strategies. Kaplan is a member of various retirement services organizations and a frequent speaker at industry events, conferences and meetings. 

(This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax adviser.)