Modernizing The 401(k)

Now you can fill the gaps in your client’s income-portfolio

by Phil Maffei

When it comes to helping Americans accumulate critical retirement savings, 401(k) plans have had a huge impact – but also an unintended, problematic consequence for Americans’ ability to secure guaranteed retirement income.

The good news is that a powerful lifetime income solution is now emerging, and the 401(k) market, as it turns out, is ripe to adopt these solutions. And so, private providers are introducing products that build a lifetime income feature right into the 401(k) structure.** The concept within the product addresses fundamental shortcomings of defined-contribution (DC) accounts by providing the option for defined benefit (DB)-like pension income for life.

The 401(k)’s Fundamental Drawback

The problem is rooted in the 401(k)’s dominant role in today’s retirement planning system. According to the Investment Company Institute, the leading association representing regulated funds globally, 401(k) plans held an estimated $7.3 trillion in assets and represented nearly one-fifth of the $37.2 trillion U.S. retirement market as of June of 2021, with about 60 million active participants and millions of former employees and retirees.

However, the 401(k) plan was originally designed as a supplemental savings plan to provide additional tax-qualified savings to complement retirement income for life provided by a DB pension plan. It was never intended to be an income plan – they are pure tax-advantaged savings plans. The idea was simply to complement Social Security, private savings and, importantly, traditional DB pension plans. But since the 401(k)’s introduction in the 1970s, more and more companies have adopted the plans in place of traditional DB pensions, Investopedia says. Indeed, of the 67% of private industry workers who had access to retirement plans in 2020, just 12% had access to both pension plans and DC plans like the 401(k), and 52% had access only to DC plans, the U.S. Bureau of Labor Statistics reported.

Managing The Savings Gap

The upshot? Today, there is a “coverage gap” – not enough Americans have access to retirement plans – and a “savings gap” – Americans still should be saving more, 401(k)’s effectiveness notwithstanding. But there also is a “guarantee gap”: Americans’ ability to access critical, guaranteed retirement income for life has become much less certain than before as 401(k) use has spread, private pensions have become uncommon and Social Security’s sustainability and future benefit levels have been questioned.

The retirement-planning community and policymakers know that it is long past time to leverage the 401(k)’s ubiquity, take the plans to a next level and help close the guarantee gap. And now, that’s exactly what’s happening.

Establishing Income As A Key 401(k) Outcome

The delivery of lifetime income solutions got a considerable boost with the passage of the SECURE Act in 2019, which, among other benefits to Americans’ retirement security, provided plan sponsors with a specific set of criteria to use to evaluate lifetime income solutions (also known as “annuity products”) within employer-sponsored DC plans.

Of course, secure income should be considered an essential “outcome” of any effective retirement plan. Over the course of our 100 years, we have demonstrated the difference that guaranteed income can make in ensuring financial security, peace of mind and dignity in retirement.

TIAA believes its solution can transform DC plans, elevating them from simple accumulation vehicles into true retirement investing and lifetime income plans.

Long-Term Participation Yields A Unique Benefit

Here’s how the TIAA Secure Income Account works:

Via a 401(k) plan, employees make a regular, payroll contribution to the SIA which sits inside in a plan’s target-date default structure or opt-in managed account service. Funds in the SIA will have a guaranteed minimum interest rate, re-determined annually, and interest also can be credited above the minimum guaranteed rate. Importantly, interest rates are announced in advance of the period in which they apply.

Importantly, with guaranteed growth over time, SIA savings balances will not lose value, no matter what the market does.

Employees can be rewarded with higher amounts of income the earlier and longer they participate, which could be in the range of 5% to 20% more lifetime income. In fact, TIAA’s fixed annuities such as the SIA are the only known DC plan offering to provide this kind of “loyalty bonus” benefit. And the SIA is portable, meaning that (if plan rules allow) an employee can take their saving balance with them if they leave their employer or the workforce (or if the plan removes the SIA from its investment menu) and transfer it to a TIAA fixed annuity within a TIAA IRA, which provides for similar guaranteed growth and lifetime income features, including, the retention of any accumulated “loyalty bonus.”

At retirement, participants – if they choose – can convert all or a portion of their SIA savings (which represents a portion of their total 401(k) balance) to monthly income they cannot outlive, a process called “annuitizing.” And in retirement, those lifetime income payments may increase, which can help offset inflation effects. Many people already receiving lifetime income from TIAA fixed annuities are enjoying this year a 5% increase in their lifetime income payments – the largest such bump in 40 years.

Flexibility was a key consideration when designing the SIA. The account has several such features, including: the ability to take full or partial withdrawals at retirement in lieu of annuitizing, the ability to annuitize multiple amounts on multiple dates (e.g., convert some to lifetime income at retirement and then convert more to lifetime income x years hence), and the ability to select multiple payment frequencies (e.g., annuitize one amount to provide for monthly payments in retirement and then annuitize another amount, choosing an annual payment to be delivered in December for the holidays or April for tax time, similar to getting a “bonus” check that employees may have enjoyed while they were previously working).

The Benefits Of Lifetime Income

Guaranteed lifetime income offers a wealth of benefits, compounded even further when people tap the income via a user-friendly workplace retirement plan supported by a trustworthy provider. Consider this:

Managing Longevity

The average time spent in retirement is 19 years for men and 21 years for women, according to the Social Security Administration; many will beat the averages. Without a regular pension, how do you determine how much to regularly withdraw from your retirement savings? An annuity-based stream of income, guaranteed literally for life, coupled with a liquid investment portfolio representing the non-annuitized 401(k) assets, solves the problem of not outliving your assets, but also retaining an investment account to participate in potential market gains and provide a cushion for retirement expense emergencies.

Supporting Women In Retirement 


The National Center for Health Statistics states women, at birth, have about a five-year longevity edge, so the financial risk they run based on lifespan is that much greater, particularly if they haven’t saved a lot on their own. (Based on data from January 2020 through June 2020.) Guaranteed retirement income can reduce this added risk.

Managing Market Risk


Retirement savers need to maintain some exposure to the investment markets, both equities and bonds, but it comes with risk. Bond portfolios – often a source of retirement income – are not immune: they can be negatively affected, as well, due to interest rate movements. Damage can be worse for older retirement savers, who have that much less time to recoup and recover from their losses. A guaranteed return feature like the one SIA offers ensures such downturns won’t affect the savings the participant has earmarked specifically for retirement income.

Managing The Potential Risk To Social Security’s Solvency

Unfortunately, retirement savers can no longer fully count on Social Security. The Social Security Administration has said it expects to pay full benefits on a timely basis only until 2037, when the trust fund reserves are projected to become exhausted. At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits, the Administration said; Congress will need to make changes to the scheduled benefits and revenue sources for the program going forward.

Overcoming Procrastination


A valuable SIA advantage is that the account can be embedded within the 401(k) plan’s qualified default investment alternative (QDIA) – giving sponsors the ability to simply direct a portion of employee and employer contributions into the accounts on enrollment, unless a participant opts out. With the default’s help, even natural procrastinators can get started on securing income early on – with the extra advantage of earning the additional return and income benefits that can accrue to long-term SIA participants.

Mitigating Post-Retirement Financial Decision Risk


Electing a stream of lifetime income in retirement that’s automatically sent to the retiree each month can help minimize the risk of poor investment decisions that could arise should cognitive decline set in along an individual’s retirement horizon. Plus, by pre-selecting income to continue to a spouse after death, this can make it easier for the surviving spouse if they weren’t typically involved in the couple’s financial planning.

Overcoming Marketplace Uncertainty

Annuities can be hard to understand, and some people shy away. With the SIA, the annuity-buying decision essentially is managed for the participant; the account gives participants the comfort of tapping an annuity within a well-understood retirement plan format.

This material is for informational or educational purposes only and does not constitute investment advice under ERISA.

This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

The TIAA Secure Income Account is a guaranteed insurance contract and not an investment for federal securities law purposes. Interest credited to the TIAA Secure Income Account includes a guaranteed rate, plus additional amounts as may be established by the TIAA Board of Trustees. Additional amounts are not guaranteed for periods other than the period for which they are declared. All guarantees under contracts issued by TIAA are based on TIAA’s claims-paying ability. Past performance is no guarantee of future results.

The TIAA Secure Income Account is approved for issuance in 52 of 53 U.S. insurance jurisdictions. It is not approved to be issued to New York domiciled contract holders.

TIAA Secure Income Account is issued through Teachers Insurance and Annuity Association of America (TIAA).
For Institutional Investor use only. Not for use with or distribution to the public.

©2022 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017