There’s a New Way to Convert Your 401(k) into a Pension-like Stream of Income

Creating reliable streams of retirement income is one of the most important elements of a person’s financial plan. A retirement industry giant says it now has a new way for retirees to meet this vital challenge.

Fidelity Investments plans to launch a new product next year that will allow individuals to shift a portion of their employer-sponsored retirement plan into an annuity. The offering, called Guaranteed Income Direct, will enable participants of 401(k) and 403(b) plans to convert their retirement savings into a guaranteed stream of retirement income akin to pension payouts.

Fidelity’s product is not the first of its kind. Since the passage of the SECURE Act in 2019, the financial services industry has begun offering annuities within retirement plans to meet a growing demand for annuitized streams of income.

It’s important to note that annuities are often maligned for their high costs and complex structures. A financial advisor can help you determine whether an annuity is an appropriate investment option for you.

Fidelity’s New Product

Fidelity says its Guaranteed Income Direct will allow employers to offer an immediate income annuity to employees through an insurer of their choosing. Fidelity will provide digital tools through its employees benefits portal to help workers determine the appropriate amount of guaranteed income, Fidelity said in a press release announcing the new product.

Plan participants will have the ability to convert any amount of retirement savings into an annuity that will function like a “personal pension,” the company said. Individuals can convert savings regardless of whether the money is allocated to mutual funds, individual stocks or other assets.

Any money that is not converted into an annuity can remain in the workplace savings plan.

“Shifting from saving for retirement to living in retirement is one of the biggest transitions a person will make in their lifetime, and one of the top challenges facing individuals during this transition is how to ensure that they have enough predictable income to cover their essential expenses,” Keri Dogan, senior vice president of retirement solutions at Fidelity, said in the press release.

Fidelity said the product will be available for select clients in the first half of 2022 before becoming more widely available in the second half of the year.

Annuities in Retirement Plans: A Growing Trend

Fidelity is the latest financial services company to add an annuity option to its retirement plans.

BlackRock, the world’s largest asset manager, has added a target date strategy called LifePath Paycheck that allows retirement plan participants to purchase a lifetime stream of income using their retirement savings.

Meanwhile, Nationwide announced last month it’s teaming up with Capital Group to launch a similar product that packages a target date fund with a lifetime annuity.

This proliferation of annuities within retirement plans is a byproduct of the SECURE Act, the comprehensive retirement legislation signed into law in 2019. The law made it easier for plan sponsors to integrate annuities into retirement plans by defining the ways in which a sponsor can satisfy their fiduciary obligations when offering streams of guaranteed income to participants.

The shift also comes at a time when traditional pension plans have become more and more rare.

According to the Bureau of Labor Statistics, only 15% of private workers have access to both defined benefit (pensions) and defined contribution retirement plans in 2021. Meanwhile, only 3% have access to only defined benefit plans. That’s a significant decline from 1975 when about 74% of private workers were enrolled in defined benefit pensions, according to Department of Labor data.

With Social Security facing significant funding challenges that could reduce future benefits by 25%, retirement savers will likely seek out new ways to add reliable sources of income to their financial plans.

Bottom Line

Annuities have become an increasingly popular offering within retirement plans since the passage of the SECURE Act. Fidelity Investments will roll out its own annuity option in 2022 that will allow participants of 401(k)s and 403(b)s to convert their retirement savings into guaranteed streams of lifetime income. However, with high costs and complicated structures, annuities aren’t a one-size-fits-all solution for retirees. A financial advisor can help you determine whether they should be part of your plan for retirement.

Tips for Managing Your Retirement Savings

• Are you saving enough? Experts say your expenses in retirement will be about 80% of what they were prior to retiring. SmartAsset’s Retirement Calculator can help you determine how much you’ll need in your golden years and whether your on track.
• A financial advisor can be a trusted partner as you plan for retirement, helping you determine what your needs will be and how to meet them. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.