By Anne Arvia of Nationwide Financial Services

As the burden for retirement planning continues to shift from companies to individuals, policymakers are accelerating discussions to foster solutions for a growing challenge. While people need to save more aggressively for the long term, there is a real opportunity for government to develop more effective vehicles to help businesses and households tackle the retirement challenge.

An innovation in annuities and 401(k)s could be one of those solutions.

Nearly 75% of U.S. adults agree that the 401(k) system needs to be updated to include features offering guaranteed income in retirement.

For months the federal Labor and Treasury departments have been seeking input from participants, plans, employers, financial services companies and other interested parties on ways to incorporate lifetime income options, such as annuities, into the 401(k) system. Last year the DOL held a two-day hearing in Washington to discuss potential solutions in greater detail.

It's an important topic for the retirement services industry, but it's critical for the millions of American workers who face the prospect of outliving their retirement assets. In a telephone survey by Harris Interactive in April, nearly 75% of U.S. adults agreed that the 401(k) system needs to be updated to include features that offer guaranteed income in retirement.

The current system plays a vital role in helping workers prepare financially for retirement, but it can be improved in two key ways.
  • Increasing the overall access to employer-sponsored retirement plans.
  • Promoting features within the defined contribution system that offer income guarantees similar to what was once provided by traditional defined benefit pension plans.

This is where the annuity innovation comes in, because one solution could be to provide a strong incentive for 401(k) plan sponsors -- employers -- to offer fixed-income deferred annuities as the investment option for the employer match. The key is that employees would be effectively using the employer match to buy annuity income in small amounts throughout their career. This would have three important effects:

If an employee waits until retirement to buy an annuity, the purchase would be a large one, which can be intimidating; buying in small pieces over an entire career makes it much easier.

By introducing the annuity concept to employees early in their career, the plan should help employees understand that their real goal is not accumulation, but having adequate income throughout their lives.

Employees who wait to buy an annuity at retirement run the risk that interest rates will be low at that time, shrinking the size of the annuity their accounts can buy. Buying the annuity over an entire career helps avoid this risk.

Not only does this idea make policy sense; it is popular. Consumers are overwhelmingly in favor of a 401(k) retirement plan system that dedicates employer contributions as a guaranteed income stream. The Harris survey found that 77% of U.S. adults support this concept.

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Anne Arvia is senior vice president of retirement plans for Nationwide Financial Services in Columbus, Ohio.