FIAs offer another way to make savings last.

Today’s business owners, seeking an optimal 401(k) plan for themselves and their employees, face an intimidating task: creating a conservative option that protects participants from outliving their money.

For years, financial professionals have advised clients to maximize their contributions to their company’s 401(k) plans and balance their allocation for highest growth within their risk parameters.

“Now, as retirement looms on the horizon, many 401(k) participants must find ways to direct those funds into more conservative investments that generate income throughout retirement,” according to financial adviser, Ph.D. economist and author Shelby Smith.

The insurance industry’s fixed indexed annuity (FIA) can help meet this retirement income challenge.

How FIAs Work

What distinguishes an FIA from a traditional fixed annuity, which has rates that are locked in for a set period of time, is that its rate of return can move upward. Any movements are based on a formula established by the insurance company providing the annuity. That formula is linked to the movements of an index tied to the equities market, such as the S&P 500. The overall rate typically includes a minimum guaranteed interest rate combined with an interest rate linked to the equity index. The effect is that when that index posts gains over a given period of time, the FIA’s rate of return increases, too.

Certain obstacles have prevented its addition to the options offered within 401(k) plans—at least on an equal footing with traditional investment choices like mutual funds or, more recently, exchange traded funds (ETFs).

Those barriers to entry have recently been dismantled. After years of work, a major insurance company has recently introduced an FIA exclusively for 401(k) plans. The FIA allows those approaching retirement and conservative investors (regardless of age or time horizon to retirement) to complement traditional 401(k) investment choices by offering a lifetime income guarantee. Keep in mind, the guarantees are dependent upon the claims-paying ability of the issuing company, so it’s important to ensure that a highly rated company is issuing the FIA.

Potential Benefits

Most 401(k) options—at least, the ones that are traditionally available to employees—are investments that move up or down in value as markets and interest rates change. Fixed-rate options are potentially safer, but they offer materially lower growth opportunity and no inflation protection.

The benefits to using an FIA include the following:

• If contributions and matches continue until the planned retirement date, the roll-up interest rate of an FIA with a guaranteed lifetime income rider makes it possible to exactly predict the minimum balance in the annuity’s income account.
• Since both the minimum income account balance and the age of the employee are known on the planned retirement date, the minimum amount of guaranteed lifetime income from the annuity is also known.
• The guaranteed lifetime income continues until the annuity owner dies, even if the accumulation value goes to zero. In addition, the owner has the flexibility of stopping and restarting the income at any time or withdrawing all or part of the accumulation balance in a lump sum.
• Until income is elected under the guaranteed lifetime income rider, the annual changes in both the accumulation and income values can only be sideways or up, never down, regardless of market or interest rate changes.

If you currently participate in a 401(k) plan, or provide a 401(k) profit-sharing plan for your employees, adding an FIA option can help ensure that you and your best employees have incomes that will endure through retirement.