Turning Your 401(k) Into a Retirement Paycheck

Summary

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WSJ Your Money Briefing

Episode Summary: Turning Your 401(k) Into a Retirement Paycheck

Date: January 30, 2020
Host: J.R. Whalen
Guest: Ann Tergeson (WSJ Personal Finance Reporter)

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Episode Overview

This episode explores how 401(k) plans are evolving to address the decline of traditional pension plans. As more Americans face retirement without the safety net of a pension, 401(k) providers and employers are introducing new tools—such as annuities and managed payout funds—to help retirees turn their savings into a reliable income stream. Personal finance reporter Ann Tergeson breaks down these developments, explains the impact of recent legislation, and offers practical guidance for navigating 401(k) income options.

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Key Discussion Points and Insights

1. The Shift from Pensions to 401(k)s

• Context: Traditional pensions, which acted as "retirement paychecks" for many, are now rare.
  • "[F]ewer people than ever have a pension plan, a sort of retirement paycheck that allows retirees to make their nest egg last. To fill that gap, 401k plans are starting to feature more investment tools to help retired Americans manage their savings." (J.R. Whalen, 00:35)
• The onus is increasingly on individuals to make their retirement savings last.

2. Baby Boomers and 401(k) Fee Pressures

• As baby boomers retire and withdraw funds, plans lose assets, potentially impacting fee negotiations with providers.
  • "401 plans are seeing with baby boomers retiring in greater numbers, they're seeing assets kind of leave the plan as baby boomers take their money out and roll it over to an IRA. That's kind of a bad thing for plans because in order to negotiate lower fees, they need more assets." (Ann Tergeson, 01:41)
• To retain these assets, plan sponsors are adding income-producing products and features.

3. Introduction of Annuities to 401(k) Plans

• A new law (the Secure Act) passed in late 2019 allows easier inclusion of annuities in 401(k) plans.
  • "In the waning days of December, Congress passed the Secure act, which includes a provision that basically makes it easier for employers to offer annuities." (Ann Tergeson, 02:31)
• While not yet widespread, providers and employers are starting to introduce annuities as an income option for retirees.

4. How Annuities Work in 401(k)s

• The core annuity concept: Contribute over time, then receive a guaranteed income payout at retirement.
  • "You pay in over time and when you hit retirement, you receive a locked in kind of guaranteed income." (Ann Tergeson, 03:01)
• There are multiple types of annuities, with different trade-offs and restrictions.

5. Risks and Alternatives to Annuities

• Downsides: Some annuities require irrevocable decisions at retirement. Once purchased, that money may become inaccessible.
  • "The downside of annuities... some of them require you to make an irrevocable purchase at a certain time. ... Those who buy them, whatever portion of their assets they use and put into an annuity, they may not be able to get that money back." (Ann Tergeson, 03:22)
• As an alternative, some employers offer payout-oriented mutual funds—offering flexible, but non-guaranteed, income (often ~5% annually).

6. The Need for Personalized Advice

• Not all retirees have straightforward financial circumstances.
  • "Some individuals are very astute...but most people probably don't have the interest, the time, or in some cases the expertise... So these services are trying to make it easier for them." (Ann Tergeson, 04:25)
• A "one size fits all" product isn't always suitable, especially for those with complex tax or financial needs.
• Some employers now provide advice services, but these may also be broad in scope.

7. What Happens to Your 401(k) When You Die?

• You designate a beneficiary when you set up your account.
• For annuities, death benefits vary: some offer a return of principal or other payouts; with some, "if you die the next day, you...don't receive anything back."
  • "With other annuities you put your money in and there is some kind of a death benefit, whether it's a return of principal or something else. So that's something that you would need to check when you purchase an annuity in a 401k plan." (Ann Tergeson, 05:27)

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Notable Quotes & Memorable Moments

• On pension decline:

  • “Fewer people than ever have a pension plan, a sort of retirement paycheck that allows retirees to make their nest egg last.”
    — J.R. Whalen (00:35)

• On rising demand for income solutions:

  • "[T]hey're introducing some income produc investments and services designed to help retirees turn their nest eggs into a paycheck. ...change is slow in the 401 industry."
    — Ann Tergeson (01:41)

• On annuities and their trade-offs:

  • “The downside of annuities, and not every annuity has this feature, but some of them require you to make an irrevocable purchase at a certain time. ...whatever portion of their assets they use and put into an annuity, they may not be able to get that money back.”
    — Ann Tergeson (03:22)

• On individualized advice:

  • "Some people are ready, willing and able to take that on, but most people probably don't have the interest, the time, or in some cases the expertise to do that."
    — Ann Tergeson (04:25)

• On annuity death benefits:

  • "With some annuities you put your money in and if you die the next day, you don't receive you or your heirs don't receive anything back. With other annuities ... there is some kind of a death benefit."
    — Ann Tergeson (05:27)

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Segment Timestamps

• 00:35 — 01:41: Setting the stage—decline of pensions and changing 401(k) landscape
• 01:41 — 02:26: Baby boomers, asset outflows, and fee pressures
• 02:26 — 03:17: New laws and the rise of annuities in 401(k)s
• 03:17 — 04:15: Annuity structures, alternatives, and their risks
• 04:15 — 05:22: The complexity of retirement withdrawals and need for advice
• 05:22 — 06:06: Beneficiaries and what happens to 401(k) holdings (and annuities) at death

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Tone & Style

The conversation is matter-of-fact, informative, and approachable, blending explanatory journalism with practical guidance. Ann Tergeson's explanations are clear but cautious—reflecting the gradual pace of change in the retirement industry and the importance of considering personal circumstances before making irreversible financial decisions.

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Summary by WSJ Your Money Briefing Podcast Summarizer

Transcript

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[J.R. Whalen]

Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Fewer people than ever have a pension plan, a sort of retirement paycheck that allows retirees to make their nest egg last. To fill that gap, 401k plans are starting to feature more investment tools to help retired Americans manage their savings.

[Ann Tergeson]

You pay in over time and when you hit retirement you receive a locked in kind of guaranteed income that' Wall

[J.R. Whalen]

Street Journal personal finance reporter Ann Tergeson. She'll explain some of the features that employers are adding to these plans and how baby boomers have upended the 401k business. That's next. With pensions all but extinct, more 401 retirement plans are making it easier for retirees to stretch out their savings. Wall Street Journal personal finance reporter Ann Tergerson is here to discuss. So Ann, it seems like we're in a new era of 401k accounts because of the age of baby boomers and how that affects a lot of things, including the fees that go with 401s.

[Ann Tergeson]

401 plans are seeing with baby boomers retiring in greater numbers, they're seeing assets kind of leave the plan as baby boomers take their money out and roll it over to an ira. That's kind of a bad thing for plans because in order to negotiate lower fees, they need more assets. So they're trying to hold onto those assets. And as a way of doing so, they're introducing some income produc investments and services designed to help retirees turn their nest eggs into a paycheck. This is by no means like, you know, prevalent in the industry, but it's starting to become more commonplace. And I think, you know, change is slow in the 401 industry. Not every employer wants to hang onto retirees money. But you know, I think we're going to see more and more of this.

[J.R. Whalen]

And there's a new law that took effect this year. It allows some 401 plans to offer annuities.

[Ann Tergeson]

Exactly. So that's actually added some momentum to this tre. And in the waning days of December, Congress passed the Secure act, which includes a Provision that basically makes it easier for employers to offer annuities. So by no means are you seeing every employer add annuities, but we're starting to slowly see asset management companies add annuities to existing 401 type products. And they're trying to interest employers in offering these things.

[J.R. Whalen]

And the annuity allows for a regular payout to people.

[Ann Tergeson]

Yeah, and there's a couple different types of annuities. Actually there's several different variations. But you know, basically, yes, they all operate on that same variation, which is that you pay in over time and when you hit retirement, you receive a locked in kind of guaranteed income.

[J.R. Whalen]

Are there other income providing features that employers are able to add to 401 plans?

[Ann Tergeson]

The downside of annuities, and not every annuity has this feature, but some of them require you to make an irrevocable purchase at a certain time. Within the context of 401, that's usually at the point of retirement. The choice is up to you want to buy an annuity or not. Those who buy them, whatever portion of their assets they use and put into an annuity, they may not be able to get that money back. A lot of employers are reluctant to embrace that approach. Or maybe they offer annuities to people who want that. But for people who don't want to lock their money up in an annuity, they offer mutual funds that allow you. The mutual funds provide a certain level of payment annually, usually something on the order of 5% of the balance, but it's not a guarantee. So if the market goes down, your income could go down.

[J.R. Whalen]

But simply relying on a menu of 401 investment choices that are offered by an employer might not be appropriate for somebody with a more complex financial life.

[Ann Tergeson]

You know, some individuals are very astute and they understand how to manage their money and they understand how to withdraw it in retirement, you know, in order to sort of get a better. Maybe they have complex tax situation. So managing the money and withdrawing it can be a complicated task. I mean, some people are ready, willing and able to take that on, but most people probably don't have the interest, the time, or in some cases the expertise to do that. So these services are trying to make it easier for them. Some of them take a kind of a one size fits all approach. So if you've got complex financial situation, you may not just want to automatically roll into an annuity or a mutual fund that gives you a 5% payout per year. You might actually want to receive more advice. And some employers are also stepping up and offering some advice, components or services to those people.

[J.R. Whalen]

And by the way, when the owner of a 401 account dies, what happens to the holdings in that account?

[Ann Tergeson]

So when you set up your 401 account, you should have selected a beneficiary who would rece receive the assets in the event you die. Most people designate a spouse. If you hold annuities within your 401k then the answer to that question is something that you should figure out before you buy the annuity. Some annuities, with some annuities you put your money in and if you die the next day, you don't receive you or your heirs don't receive anything back. With other annuities you put your money in and there is some kind of a death benefit, whether it's a return of principal or something else. So that's something that you would need to check when you purchase an annuity in a 401k plan.

[J.R. Whalen]

And that's personal finance reporter Ann Tergeson with us. Ann, thanks for coming on the show.

[Ann Tergeson]

You're welcome.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Deel Advertiser]

Still running global payroll like A relay race deal replaces fragmented payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP Netsuite operate like a local everywhere visit d e l.com WSJ that's d e e l.com WSJ.