If you have a 401(k), there’s a good chance you have been exposed to target date funds – mutual funds that grow more conservative as you approach retirement.
But while these types of investment products can be a good vehicle for accumulating and growing your assets, they don’t provide a guarantee that your nest egg will last.
A new flavor of target date funds does just that.
Increasingly 401(k) plans are offering funds that have an extra kicker: guaranteed minimum withdrawal benefits. Think of them as a variable annuity within a 401(k) plan.
“Nine out of ten Americans are concerned they will outlive savings in retirement,” said Jamie Kalamarides, senior vice president, Institutional Investment Solutions at Prudential Retirement, which markets Prudential IncomeFlex Target.
“This product makes sure you will not outlive your money and gives you flexibility and control.”
Prudential recently announced that it will make its IncomeFlex Target available to 401(k) plans that use target-date funds from big names like Vanguard and T. Rowe Price.
So what do you get?
During your working years, starting ten years before the end-date on your target date fund, Prudential guarantees that your income base – the amount your withdrawals are based on – will never be lower than your highest annual birthday value, plus contributions, regardless of market performance.
Once you lock in your income benefit, starting as early as age 55, you are guaranteed a check for life, even if your account goes to zero. At 65 or later, the payout is equal to 5% of the account’s income base. If the base goes up, you get more.
Unlike a fixed immediate annuity, you can access your principal at any time, free of charge. But if you take money out, your income base will go down.
Guarantees don’t come cheap. You will pay a 1% annual fee. That is on top of the fee you would pay for the target date fund. As with any annuity product, you are counting on the insurance company’s future ability to meet its obligations.
For now the market for these newfangled target date funds is small. Prudential’s IncomeFlex Target is available in about 7,000 retirement plans.
But they are poised to gain steam. Both the Department of the Treasury and the Department of Labor are expected to put out guidance in the next few months that will add some clarity.
“Then the use may spread more quickly,” said Dallas Salisbury, president of the Employee Benefit Research Institute.
Prudential believes demand will grow as stressed-out baby boomers increasingly search for security in uncertain times.
“Just as target date funds have been the focus for the last ten years, we think the big issue for the next ten years is translating that accumulated wealth into income for life,” Kalamarides said.
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