The 403(b) lifetime income lesson for 401(k) plans
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Comvest closes credit fund at $1.3 billion
      Wall Street signage in the Financial District of New York
      Assets in alternative investments set record in 2020
      Non-profit questions dividend recapitalization play at Ares portfolio company
      Walker & Dunlop appoints managing director
    • Philip Pearson
      Hymans Robertson chooses head of LGPS investment
      Daniel Celeghin
      Indefi hires New York-based managing partner
      Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
    • Pandemic takes toll on real estate fundraising in 2020
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Systematic hedge fund IPM to shutter after ‘lackluster’ performance, outflows
      Insurers taking on more portfolio risk as pandemic ebbs – survey
      American flags outside the New York Stock Exchange
      Stock shorts collapse as no hedge fund wants ‘head ripped off’
    • Comfortable retirement still on track for most Americans despite pandemic – survey
      Pentegra joins with EPIC to offer 3(16) fiduciary services
      Interest rises in keeping retiree assets in-plan
      Joseph Healy
      Smaller DC plans place greater focus on improving financial wellness efforts
    • CDPQ boosts low-carbon assets to 10% of portfolio
      White House sets ambitious goal for greenhouse gas emissions by 2030
      Yale rolls out 5 principles for endowment on fossil-fuel investing
      Pension funds hear from beneficiaries on ESG – report
    • Riscura stories
      Dystopian tales explore altered retirement reality
      Joel Holsinger
      Ares wants to do good – and profit – with fund
      Girls Who Invest
      MetLife plans 3 internships for Girls Who Invest scholars
      Model home
      Resmark sees niche in buying, leasing model homes
    • Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Systematic hedge fund IPM to shutter after ‘lackluster’ performance, outflows
      Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
    • The seal of the Securities and Exchanges Commission at the agency's headquarters in Washington
      SEC said to review fund disclosure rules after Archegos rout
      Trillium hires 2 to lead expansion into U.K.
      CDPQ boosts low-carbon assets to 10% of portfolio
      White House sets ambitious goal for greenhouse gas emissions by 2030
    • Blackstone AUM climbs 4.9% in latest quarter
      Trillium hires 2 to lead expansion into U.K.
      Credit Suisse logo
      Credit Suisse expects further hit from Archegos scandal
      Bill Hench
      First Eagle gives wing to small-cap equity team with liftout from Royce
    • Denmark’s ATP plans bid to build North Sea energy island
      PennPSERS taps Verus for oversight consulting services amid probe
      State pension plan funding advances in first quarter – Wilshire
      Sacramento County Employees rebalances equity, fixed-income portfolios
    • Trillium hires 2 to lead expansion into U.K.
      Walker & Dunlop appoints managing director
      Bill Hench
      First Eagle gives wing to small-cap equity team with liftout from Royce
      Philip Pearson
      Hymans Robertson chooses head of LGPS investment
    • EQT closes latest private equity fund at $18.7 billion
      U.S. $100 bills
      AlpInvest raises $3.5 billion for latest co-investment fund
      ILPA members making diversity a bigger priority in private equity
      European private equity deal value, volume hit records for first quarter
    • Pandemic takes toll on real estate fundraising in 2020
      J. Tomlinson Hill
      Two Sigma takes quant expertise into real estate investing
      BentallGreenOak closes latest European fund at $2.3 billion
      Cohen & Steers adds team for new private real estate business
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • A coin representing Bitcoin cryptocurrency in the U.K.
      Cryptocurrency and digital assets
      Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Orange County Employees commits $55 million to 2 buyout funds
      Alexandria, Va., scouting for DB and DC plan consultants
      Gresham, Ore., hunting for 457 plan consultant
      San Joaquin County casts net for core bond managers
    • Orange County Employees commits $55 million to 2 buyout funds
      Alexandria, Va., scouting for DB and DC plan consultants
      Gresham, Ore., hunting for 457 plan consultant
      San Joaquin County casts net for core bond managers
    • Emerging Market Debt Manager Services
      Real Assets Consultant
      Passive Investment Management Services
      Active Extended Global Credit Manager Search
    • High-yield spreads narrow, default rates drop
      Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      BPTW cartoon
      P&I’s Best Places to Work marking a milestone
      CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • Invesco logo shown on the floor of the New York Stock Exchange
      watch video
      1:28
      Invesco’s bid for performance gains
      watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
    • POLL: Cryptocurrency investing
      POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • High-yield spreads narrow, default rates drop
      By the Numbers for April 2021
      Graphic: The state of DC plans
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
      Retirement Income Conference
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. DEFINED CONTRIBUTION
November 30, 2015 12:00 AM

The 403(b) lifetime income lesson for 401(k) plans

Teresa Hassara
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Teresa Hassara

    At TIAA-CREF, we think turning 100 deserves recognition. Our CEO, Roger W. Ferguson, sends a bouquet of flowers to each of our plan participants when they reach the century mark. It's a simple gesture to honor a remarkable life. Amazingly, we send out between 30 and 40 of these birthday bouquets every month. And we're not stopping anytime soon. We have 22,000 clients between the ages of 90 and 100 — and another 94,000 between 80 and 90.

    This isn't just a testament to TIAA-CREF's heart, it's also a testament to the increasing longevity of the American people. A couple at age 65 now has an 89% chance of one spouse living to 85, according to TIAA actuarial projections. Longer lives are reason to celebrate, for sure, but also reason for workers to ask: “Can I afford to be retired for 30 years or more?”

    Many defined contribution plans in the not-for-profit sector — educational institutions, charities, hospitals, churches and the like — have an answer to this question. Not-for-profit defined contribution plans commonly help to mimic defined benefit pensions by focusing on lifetime income. They also typically incorporate guaranteed retirement income products and provide communication, education and advice that can help keep participants focused on monthly retirement income rather than on lump-sum savings. Defined contribution plans in the for-profit sector would do well to emulate these features.

    For simplicity's sake, when we talk about defined contribution plans in the not-for-profit sector, we're usually talking about 403(b) plans, as opposed to the 401(k) plans that are widely used among for-profit companies, although non-profit institutions may also offer 401(k)s. Both plans share common features, such as retirement savings funded through employer and employee contributions, but there are differences.

    The most important distinguishing feature of 403(b) plans is that they were designed to provide lifetime income for people in retirement. In fact, when 403(b) plans were first authorized in the 1950s, they could only offer annuities. The restriction ended in 1974 with the passage of the Employee Retirement Income Security Act, but the focus on lifetime income in 403(b) plans — and thus throughout the not-for-profit workforce — remains strong. 401(k) plans, on the other hand, were originally introduced as a way to supplement the retirement income workers could expect from their defined benefit pensions.

    Given their long focus on annuities, 403(b) plans typically offer an in-plan annuity to which workers can contribute over many decades. Having an in-plan annuity option is important. While anyone can annuitize a portion of their retirement savings when they reach retirement, research shows that people who contribute to an in-plan annuity during their working years are much more likely to annuitize when they retire, according to “Retirees, Annuitization and Defined Contribution Plans,” by Paul J. Yakoboski, (a Trends and Issues report of TIAA-CREF Institute, April 2010).

    People who don't annuitize can access a number of drawdown products and strategies to try to avoid running out of money in retirement. But even the most prudent drawdown strategy might leave retirees vulnerable to longevity risk and market fluctuations. Only annuities provide guaranteed income for the rest of a retiree's life. As insurance products, annuity guarantees are dependent on the claims-paying ability of the company that writes the contract. But that contract goes a long way to ensuring the retiree will continue receiving regular monthly payments for as long as he or she lives.

    Regulators have taken note. An Internal Revenue Service notice, issued Oct. 24, 2014, and a Department of Labor information letter, issued Oct. 23, 2014, are paving the way for the use of deferred annuities within target-date funds held in defined contribution plans. Hopefully, this will encourage the use of annuities within TDF-qualified default investment alternatives as a best practice across defined contribution plans.

    Offering annuities in 401(k) plans would be a strong step toward enhanced retirement security, but only a first step. Defined contribution plans place the responsibility on individuals — who usually have no financial background — to select investments and then monitor their performance. They need help. In the not-for-profit sector, most plan sponsors offer personalized engagement strategies and advice to help employees make fund selections and other investment decisions with retirement income top of mind. This should be standard practice for every defined contribution plan.

    Whether they are saving through a 401(k) or a 403(b), workers love to see account balances grow. But retiring with a large account balance can give a false sense of security. Without knowing how long they will live, there's a possibility that even with a large nest egg, plan participants will outlive their savings.

    A better focus for savers is to think about how much monthly income their savings will generate. The traditional rule of thumb is that retirees should be able to replace 70% to 100% — often at a minimum, given high expenses at the onset of retirement for some — of their working income through a combination of Social Security, pensions and private savings. Retirement plan providers can reorient workers in this direction by including projected monthly income on quarterly account statements — a practice that is picking up steam in the defined contribution market.

    As 401(k) and 403(b) plans continue to converge in their operational and administrative aspects, it's easy to think of them as essentially the same product. But the divergent history of the plans — one a way to generate guaranteed lifetime income, the other a supplemental retirement savings vehicle — has left many 403(b) plan participants better prepared for a defined contribution world in which individuals are chiefly responsible for providing for their own retirement income needs. To help Americans get more out of their longer lives, 401(k) plans should take a page from the 403(b) playbook — ensure that savers aren't just thinking about how much money they'll have the day they retire, but how much income they'll have every month for the rest of their lives.

    After all, what better way is there to celebrate a 100th birthday than with a monthly income check? n


    Teresa Hassara is the Waltham, Mass.-based president, institutional retirement, of TIAA-CREF.

    Related Articles
    Retiree income major concern for plan execs
    40% of 403(b) plan executives do not review investment options — report
    Target-date fund selection: More than simply active vs. passive
    TIAA adds chief income strategist
    Plan executives slow to adopt lifetime-income options, survey finds
    Longevity, inadequate retirement planning cited as looming dangers in economic …
    Recommended for You
    Comfortable retirement still on track for most Americans despite pandemic – survey
    Comfortable retirement still on track for most Americans despite pandemic – survey
    Pentegra joins with EPIC to offer 3(16) fiduciary services
    Pentegra joins with EPIC to offer 3(16) fiduciary services
    Smaller DC plans place greater focus on improving financial wellness efforts
    Smaller DC plans place greater focus on improving financial wellness efforts
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center