Making 401(k)s More Income-Focused

Integrate payout annuities with Social Security. "Our recommendation is to delay taking Social Security benefits until age 70and to use a bridge annuity [in this case, Prudentials Income Bridge Annuity] to provide income during between the start of retirement and start of Social Security," said Jim Mahaney, marketing director, Prudential Retirement, Iselin, N.J.

The rationale: Social Security alone will not provide enough retirement income, Mahaney said, noting that over two-thirds of people currently choose to take Social Security benefits early, even though the early payout is smaller than payouts starting at the latest possible date. This early payout practice typically results in retirees "self-insuring" the shortfall between Social Security benefits and their needed amount of income, Mahaney said. Then, as costs and taxes rise, the income picture worsens.

By contrast, he said, "a flexible bridge annuity can integrate well with Social Security." For employees, it is like having a full defined benefit plan for life, he said, and tax considerations can make it even more attractive. In conclusion, he said, people, especially dual-income couples, should review options under Social Security and revisit conventional wisdom regarding things like cost of living adjustments, widows benefits, expenses and taxes.

Combine strengths of defined benefit and DC plans. Another bridging idea comes from Genworth. The approach is to help employees bridge into lifetime retirement income via a variable annuity option inside a 401(k) plan environment, said Brian F. Birmingham, vice president-institutional market strategy, Richmond, Va.

Called ClearCourse, this Genworth option is like other investment options in that it offers liquidity, valuation, cost, rollover and education tools, Birmingham said. It has institutional pricing, too.

But it is different, in that every contribution the participant makes into the option is guaranteed to pay a floor lifetime retirement income, regardless of portfolio performance, for a minimum of 20 years. In growth scenarios, the participant will receive a higher income amount, but in down markets, the participant will receive no less than the floor. Also, during the accumulation period, participants can contribute, withdraw or transfer funds to this option.

Rationale: This takes a long-term approach to asset allocation, said Birmingham. Participants "can stay fully invested," because they have the comfort of knowing they have the floor guarantee when its time to take income. Another benefit: Genworth expects it may help encourage greater plan participation.

Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.