A paycheck in retirement? MetLife shares why this can help employees once they leave your company

Employees may think they’re financially prepared for retirement, but a 401(k) cash out may be too tempting for many.

According to MetLife’s recent Paycheck or Pot of Gold survey, 90% of employees would prefer a guaranteed annuity option rather than a lump sum amount of their retirement dollars. Eighty-nine percent would prefer a combination of partial lump sum with a guaranteed monthly income.

Annuities can prevent retirees from making costly financial mistakes and resist purchases they can’t afford during those first few years in retirement, says Roberta Rafaloff, vice president of institutional income annuities at MetLife. A third of those who received a lump sum of their retirement savings have spent all of it within five years, the survey found, highlighting the necessity of employer-provided financial support.

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“People are spending more than they should because they don't have the financial background to understand how they should be spending,” Rafaloff says. “Giving people this flexibility to create a retirement income plan that best meets their needs is critical.”

An annuity option gives employees more peace of mind over their financial situation, the report found. Ninety-six percent of retirees said they felt their budget was more predictable, and 95% said they felt more financially secure.

Rafaloff says providing an annuity option can help change the dialogue around retirement plans. While 401(k)s are thought of as savings vehicles, it’s important employees think about what happens after they finish contributing.

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“Employees are focused on saving as much as they possibly can during their working careers,” Rafaloff says. “That needs to be reframed. When they get to retirement age, that’s when they need to start thinking about turning those assets into income they can't outlive, and plan sponsors really are going to play a critical role in the retirement outcomes for their workers.”

As of January 2020, just 10% of employers offered an annuity option as part of their 401(k), according to Fidelity. Sixty percent of employers declined offering this option because of possible legal ramifications if the insurance companies paying out the annuities went under, Willis Towers Watson research found.

In an effort to protect employers and make these much-wanted programs more accessible, 2019’s SECURE Act expands legal protections to employers, potentially clearing the way for employers to incorporate these options into their retirement benefits.

“One of the components of the SECURE Act includes a lifetime income disclosure, which requires that your annual plan statement shows what your lump sum is worth and what it equates to as far as guaranteed retirement income,” Rafaloff says. “As employers start to feel more comfortable offering income annuities to their workers, pre-retirees are going to probably have more options to make their money last.”

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Regardless of how employees choose to spend their hard-earned money, providing financial education, as well as folding these options into the retirement plan options employers offer, can go a long way toward helping employees make the best decisions for them.

“We need to be sure that the tools that are given and it's not just, here's your lump sum, go figure out what to do with it,” Rafaloff says. “Employees understand that guaranteed income is important and they want that, so employers really need to start offering those types of solutions in their plan, not just as retail options that are available in the marketplace, but actually make them part of their plan.”