How Organizations Can Deliver Guaranteed Lifetime Income to Employees

As the cost of living has increased and saving has become more difficult for many Americans, retirement has taken the forefront of the benefits conversation, increasing the demand and interest in guaranteed lifetime income options.

However, delivering guaranteed lifetime income is a significant challenge for finance and HR teams. This article explores how employers can help employees achieve guaranteed lifetime income and examines cost-effective options to provide this important benefit.

What is Guaranteed Lifetime Income?

Guaranteed lifetime income is often associated with annuities. But it can be more widely defined as a stream of income that cannot be outlived. This includes defined benefit pension plans and Social Security.

The Challenge of Delivering Guaranteed Lifetime Income

Delivering guaranteed lifetime income is costly for most organizations. It’s a key reason most employee-sponsored retirement options moved away from defined benefit (DB) plans and adopted defined contribution (DC) plans since the 1980s.

Since then, the 401(k) has remained the most popular option for employers, offering less risk while providing a flexible and transparent savings vehicle for the employee. However, 401(k) plans also rely on employee savings to be successful, regardless of whether the employer offers a percentage match. This makes it difficult for employees to maintain retirement savings and increases longevity risk, especially during economic downturns.

Cost-Effective Employer Solutions

Luckily, legislative support from the SECURE Act and continued interest in retirement innovation have delivered new opportunities for organizations to provide guaranteed lifetime income options. Below are three options organizations can consider implementing to provide lifetime income options to employees.

1. 401(k) with Annuity Option

With the SECURE Act, an annuity option was introduced to certain 401(k) plans, allowing employees to convert some or all of their savings into lifetime income upon retirement.

For employers, providing an annuity option on top of a current 401(k) plan can be a stepping stone to offering more sustainable retirement options. An annuity option can also be more cost-effective, acting as an add-on to an existing DC plan. It should be mentioned that annuities also come with tradeoffs, such as reduced flexibility and fees. The employee will pay a significant portion of their savings to receive a lifetime paycheck based on longevity risk. In short, reducing how much they may normally receive from their 401(k) in exchange for a guaranteed income they cannot outlive.

2. A Modern Defined Benefit Plan

Certain defined benefit models, like market-based cash balance plans, can offer significant advantages to employers and employees by providing tax savings, guaranteed income upon retirement, and reduced risk to the employer.

Market-Based Cash Balance Plans are often known for supporting legal firms, physicians, and architects, but any organization looking to deliver greater savings options to owners, executives, and other high earners can also benefit.

For more information on Market-Based Cash Balance Plans, including the benefits, challenges, and differences from other plans, feel free to read our complete guide to cash balance plans.

3. Pension Risk Transfers

Offering a bit of a mix of the options above, Pension Risk Transfer is the process of shifting a portion or all of a defined benefit plan’s liability to a third party.

They are a critical financial option for employers who want to minimize fluctuations by decreasing Pension Benefit Guaranty Corporation (PBGC) premiums, managing risk, and planning for the fate of their pension plan.

Organizations looking to deliver guaranteed lifetime income but who cannot continue to afford the risk of a traditional pension may find a Pension Risk Transfer to be beneficial.

What Else Can Organizations Do?

The following are supporting solutions organizations can implement to help employees get the most out of their retirement programs.

Financial Education and Assistance Programs

Often the least challenging to implement, employer-provided services aimed at helping employees better understand and manage their personal finances can improve financial literacy, reduce stress related to money management, and ultimately support overall well-being among employees.

Programs often include workshops, seminars, digital tools, and access to financial counselors. And though not direct savings tools, they can provide opportunities for employees to discover alternative ways of saving money that work best for their situation.

Managed Accounts

Managed accounts are professionally managed investment portfolios tailored to an individual's financial goals and risk tolerance. These accounts are often offered alongside a 401(k) plan, and involve financial experts making investment decisions on behalf of the account holder.

This can allow retirees to benefit from the advantages of financial support, potentially increasing their savings, which could provide a higher potential payout from an annuity, if they decide that is the correct course of action for their retirement.

Unlock Guaranteed Lifetime Income for Your Retirement Program

O3 PRIME maximizes employee retirement outcomes while minimizing employer costs, allowing organizations and employees to deliver lifetime income with the benefits of both a DC and a DB plan. Discover how O3 PRIME can work for your company. Schedule a free 30-minute personalized consultation today.