Your 401(k) Plan Is Getting More Income Options

Summary

---

WSJ Your Money Briefing: “Your 401(k) Plan Is Getting More Income Options”

Date: July 12, 2019
Host: J.R. Whalen
Guest: Yuka Hayashi, Wall Street Journal Reporter

---

Episode Overview

This episode takes a close look at new income options coming to 401(k) retirement plans, with a particular focus on the rise of annuity choices. Host J.R. Whalen and WSJ reporter Yuka Hayashi discuss why these changes are happening, how certain companies are pioneering guaranteed-income features in 401(k)s, and what hurdles still exist for wider adoption.

---

Key Discussion Points & Insights

1. Why Income Options in 401(k)s Matter

• Rising Concern: Americans’ retirement savings are often insufficient to maintain their pre-retirement lifestyles. Social Security simply doesn’t cover enough for most workers.

  • “Workers simply don't have enough savings to maintain their lifestyle after they retire. Because Social Security is simply not enough for so many people, and a lot of people just don't have enough savings.” — Yuka Hayashi [03:00]

• Social Security Statistics:

  • Social Security replaces less than half of average pre-retirement income, with wealthier retirees getting even less:
    • “For households that make, let's say, $130,000 a year, Social Security only replaces 27% of their lifetime average earnings.” — Yuka Hayashi [03:31]
    • The remainder must come from personal savings.

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

• Decline of Traditional Pensions:
  • Once common, pensions offering guaranteed retirement income are rapidly disappearing.
  • Now, there’s growing interest in creating similar guarantees within 401(k) plans:
    • “Traditional pension is disappearing pretty fast. And now there's an interest in allowing 401 plans to offer guaranteed income.” — J.R. Whalen [03:55]

3. Companies Leading the Way: United Technologies Case Study

• Early Innovator:

  • United Technologies (UTC) has offered an income-generating component in their 401(k) plan since 2012, following the closure of its pension to new employees.
    • “The company is United Technologies...they started in 2012 to start offering an income option in their 401k plan. And it came two years after the company closed its traditional pension plan to new employees.” — Yuka Hayashi [04:11]

• How the Plan Works:

  • The income option begins as a target date fund and gradually transitions to an annuity:
    • Employees select their planned retirement year; the fund’s investing strategy automatically shifts over time.
    • At age 48, a portion of the fund starts converting into an annuity; conversion is complete by age 60.
    • After age 60, the fund pays out approximately 5% of the assets invested each year, for life.
      • “At UTC, once the employee turns 48, a portion of that fund starts converting into annuity. And by the time the employee is 60, that conversion will be complete. After that, the fund pays out typically 5%...every year for as long as that person lives.” — Yuka Hayashi [05:29]

• Benefits for Younger Workers:

  • Early adoption maximizes potential lifetime income.
    • “If a young employee takes advantage of this program, by the time they're 48 and 60 years old, they can actually really benefit from a lot that this program has to offer.” — J.R. Whalen [06:32]

4. The Slow Growth of Income Options

• Low Adoption Rates:
  • Despite United Technologies’ example and new product launches from asset managers, uptake has been slow industry-wide.
    • “Those plans are relatively new and have not picked up a lot of traction yet.” — Yuka Hayashi [04:57]

5. Legislative and Regulatory Challenges

• Employer Concerns:

  • Employers are hesitant because annuities require guarantees from insurance companies, which aren’t regulated like banks.
  • There’s fear around potential insurance company bankruptcies, which could make employers liable for retirees’ lost income.
    • “Insurance companies are not regulated like banks. And there are lingering worries among employers that if an insurance company goes bankrupt, what would happen to their annuity fund and the liability for the company itself.” — Yuka Hayashi [06:53]

• Pending Legislation:

  • Congress may act to make annuities and income options more accessible within 401(k)s, with the goal of easing liability risks for employers and encouraging broader adoption.

---

Notable Quotes & Memorable Moments

• On How Much Social Security Covers:

  • “Social Security only replaces 27% of their lifetime average earnings. So if they want to maintain the same level of lifestyle, the remaining 73 will have to come from their savings.” — Yuka Hayashi [03:31]

• Explaining United Technologies’ Model:

  • “At UTC, once the employee turns 48, a portion of that fund starts converting into annuity. And by the time the employee is 60, that conversion will be complete. After that, the fund pays out typically 5% of the assets invested...for as long as that person lives.” — Yuka Hayashi [05:29]

• On Barriers to Wider Adoption:

  • “The reason why a lot of employers have not adopted this model is in order to guarantee monthly income and pay out annuity, you have to have guarantees from an insurance company or insurance companies.” — Yuka Hayashi [06:53]

---

Timestamps for Important Segments

• 03:00 — Why workers need more than Social Security in retirement (Yuka Hayashi explains)
• 03:31 — Shocking stats on how little Social Security replaces of higher incomes
• 04:11 — United Technologies’ 401(k) annuity option described
• 05:29 — How UTC’s income fund operates: target date fund + annuity
• 06:53 — The regulatory and adoption hurdles faced by employers

---

Tone and Language

• The discussion is practical and informational, aiming to break down complex retirement and investment topics for everyday listeners.
• Language is clear, direct, and focused on facts, with empathy for workers’ financial concerns.

---

Summary

In this episode, WSJ’s J.R. Whalen and Yuka Hayashi unpack why 401(k)s are beginning to offer more income options, especially annuities, to help Americans secure reliable retirement income in the wake of declining pensions and insufficient Social Security. Notably, United Technologies’ innovative approach is spotlighted, illustrating both the promise and the challenges of these products. Key barriers, like employer fear of liability and insurance company risk, are discussed, with hope that pending legislation could smooth the way for more widespread adoption.

Listeners come away informed about both the necessity and nuts-and-bolts of new income-generating features in 401(k)s—and why these options might matter for their own retirement planning.

Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Advocate/Activist]

Tell Congress. Stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. There are more income options coming to your 401k plan. We'll run through the details in a moment. First, some money and market news you should know. The labor department says that US consumer prices rose 0.1% in June. That's seen as a solid pace, but is not considered runaway inflation from a year earlier. Consumer prices climbed 1.6% in June, and when you take food and energy out of the equation in June, prices actually rose 0.3%. That's the biggest increase in a year and a half. Prices for shelter, which account for about a third of all consumer prices and specifically rent, strengthened in June from the prior month and helped offset the reduction in prices for food and energy. And you'll remember from previous reports that wages edged up in June. And after adjusting for the fresh inflation data, average hourly earnings increased 0.2% from May. They're up 1.5% from a year ago. And the cost of gasoline, electricity and natural gas all declined last month. The average cost of a regular gallon of gas around the US fell to $2.65 in June from $2.82 at the end of May. Yet prices rose for a variety of consumer products so such as clothing, used vehicles, medical care, household furnishings and gardening and lawn care services. And while Tesla deals with quarterly sales issues along with internal instability at the executive level, two of its cars have won top honors. The Tesla Model S was named the Ultimate Car of the Year by Motor Trend. It was stacked up against Chevrolets, Cadillacs and Toyotas made over the past 70 years. And the Model 3 was named the 2019 Car of the Year by the UK's Auto Express. It was characterized as brilliant and, quote, the best Tesla yet. Congress has plans to make it easier for people with 401k accounts to turn their savings into sustainable income. But employers are jumping out ahead of Congress to help out their workers. Let's check in with Wall Street Journal reporter Yuka Heit Hayashi from Our Washington bureau with some details. So, Yuka, this is an effort to offer annuities through an employee's 401k plans. Can you just quickly explain that this

[Yuka Hayashi]

is based on a broad understanding that workers simply don't have enough savings to maintain their lifestyle after they retire? Because Social Security is simply not enough for so many people, and a lot of people just don't have enough savings.

[J.R. Whalen]

I think what's remarkable here is the percentage of Social Security that replaces an employee's income is below half. And the higher the income, the smaller that percentage gets.

[Yuka Hayashi]

Yes. Yeah, these numbers are pretty remarkable. So for households that make, let's say, $130,000 a year, Social Security only replaces 27% of their lifetime average earnings. So if they want to maintain the same level of lifestyle, the remaining 73 will have to come from their savings.

[J.R. Whalen]

Now, in the past, many employers offered pension funds and provided guaranteed income to retirees as long as they lived. Traditional pension is disappearing pretty fast. And now there's an interest in allowing 401 plans to offer guaranteed income.

[Yuka Hayashi]

As of now, very few employers offer these 401k plans that pay out monthly income. There's one company that is, that is a big exception. The company is United Technologies. It's a big company that's based in Connecticut that makes things like Otis Elevators. And this company started in 2012 to start offering an income option in their 401k plan. And it came two years after the company closed its traditional pension plan to new employees.

[J.R. Whalen]

There are some asset management companies offering annuity options as well, but many in the industry thought that more companies would be on board with this buying now.

[Yuka Hayashi]

That's right. So in the case of United Technologies, as I mentioned, they started in 2012 and they expect that, that. That other employers would follow as well. And there are some asset management companies that do offer retirement plans that have some kind of option to pay out income. But those plans are relatively new and have not picked up a lot of traction yet.

[J.R. Whalen]

So, Yuka, regarding United Technologies, how fund operate?

[Yuka Hayashi]

At United Technologies, this income fund starts out as what we call a target date fund. That is basically a mutual fund that has both equity and fixed income. And the investor or the employee says what year you plan to retire, and management strategy of the fund changes automatically as the employee gets closer to retirement. At UTC, once the employee turns 48, a portion of that fund starts converting into annuity. And by the time the employee is 60, that conversion finishesconversion will be complete. After that, the fund pays out typically 5% of the assets invested in the employee's fund every year for the for as long as that person lives.

[J.R. Whalen]

So if a young employee takes advantage of this program, by the time they're 48 and 60 years old, they can actually really benefit from a lot that this program has to offer.

[Yuka Hayashi]

Yes, that's right.

[J.R. Whalen]

And there's another piece of this puzzle. The companies managing the funds, they need to join in as well. Do you think the pending legislation in Congress would accelerate that?

[Yuka Hayashi]

Yes. The reason why a lot of employers have not adopted this model is in order to guarant monthly income and pay out annuity, you have to have guarantees from an insurance company or insurance companies. And insurance companies are not regulated like banks. And there are lingering worries among employers that if an insurance company goes bankrupt, what would happen to their annuity fund and the liability for the company itself.

[J.R. Whalen]

All right. That's Wall Street Journal reporter Yuka Hayashi joining us from our Washington bureau. Yuka, thanks so much for coming on the show.

[Yuka Hayashi]

Well, thank you very much for having me.

[J.R. Whalen]

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

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Advocate/Activist]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.