Retirement Repair

Don't have a pension? Fear not. New 401(k) plans could make you feel like you do

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Illustration by Oliver Munday for TIME

A decade ago, 401(k) plans seemed like the ticket to carefree retirement. Workers enjoyed managing their own money and believed that 10% annual returns would flow for life like gravy. Employers were happy to match workers' contributions and ditch costly pensions. And policymakers thought they'd found the Holy Grail of quasi social safety nets.

Now, in the wake of the Great Recession, poorly performing 401(k)s are losing their luster while savings schemes akin to your dad's trusty pension are coming back. With so many workers ill prepared for retirement, some big employers, like aerospace and manufacturing giant United Technologies Corp., are testing out ways for workers to shift 401(k) assets into investments that act like annuities. So you pay, say, 30% of your 401(k) balance in return for a lifetime income stream. UTC's Lifetime Income Strategy is set to launch June 1. Dallas-based Baylor Health Care System rolled out its Income Plus option on 401(k)s for its 19,500 employees last year. And that's just the start. One in five employers expects to introduce a lifetime-income option to its 401(k) menu in the next year, according to BlackRock. "It's the right thing to do," says Robin Diamonte, UTC's chief investment officer.

It's also cheaper for companies than propping up tanking pension schemes. For United Technologies, which stopped offering a traditional pension to new workers two years ago, Diamonte says the guaranteed-income option on 401(k)s is "the best we can do."

The shift could help American savers. The new annuity-like products--which are basically mutual funds with insurance--don't offer the big returns you might get from stock investments in a 401(k). But they also don't carry the risk: your income may go up, but it will never go down. Lifetime-income options are also more flexible than traditional pensions, since they move with employees who leave a company, and employees can take out money at any time. Plus, they offer peace of mind. Studies have found that retirees with lifetime income are happier and more confident about their finances. Baylor CEO Joel Allison added the option after learning that retirement readiness was worrying employees. "They now have the ability to transition into retirement without any abrupt changes like learning to manage a [401(k)] lump sum," he says.

With interest rates so low, some consider annuities expensive and worry about inflation eating into returns. But companies like IBM and Smithfield Foods think the prospect of lifetime income might prompt employees to save more if it seems safer than stock-market gambling. In a murky economy, investing on autopilot can feel like its own reward.