A True Value Comparison of Guaranteed Income

The Impact of the SECURE Act on DC Plans

The passage of the SECURE Act and SECURE 2.0 enabled defined contribution plans to adopt lifetime retirement income solutions similar to defined benefit plans for the first time. Certainly, we’ve made progress in the roughly five decades since the launch of the 401(k) plan. However, the DC plan landscape is changing meaningfully as we begin to systematically and holistically address decumulation.

This is particularly relevant now because advances in health science and the aging of the Baby Boom generation mean that Americans are living longer in retirement than at any time in history. As a result, a record number of Americans may be at risk of outliving their retirement savings or potentially living way below their means because they are afraid to spend their savings.

Both plan sponsors and participants are motivated to adopt these lifetime income solutions. Offering in-plan income is another lever for plan sponsors to retain retiree assets while providing employees with a much-needed decumulation solution. Institutional pricing allows plan sponsors to offer guaranteed retirement income solutions at a much lower cost than an employee could achieve independently.

Moreover, our survey data show that plan participants want a retirement income solution but don’t know how to do it on their own. This makes in-plan retirement income offerings compelling additions to existing DC plans. It’s worth pointing out that according to Morningstar data, approximately two-thirds of target-date fund (TDF) assets are in vintages for those ages 50 or older as of February 2025. As a result, plan participant needs and sponsor opportunities intersect today in a way they haven’t in decades.

Comparing Two Popular Guaranteed Lifetime Income Solutions

A guaranteed withdrawal benefit (GWB) is an insured income wrapper on an investment portfolio over which the account holder maintains control. In contrast, an immediate fixed annuity (IFA) provides a (typically higher) guaranteed nominal income for life via an irrevocable transfer of an investor’s assets.

As in all such broad DC plan discussions, there is no “one ring to rule them all.” Each approach has unique advantages and disadvantages whose trade-offs must be weighed in the context of each specific plan. The GWB’s advantages are that it allows participants to retain control over their income-producing assets, providing for liquidity and, possibly, a bequest. Specifically, the GWB allows the retained assets to be deployed in growth-oriented investments. This market exposure can potentially mitigate inflation risk and provide step-ups in account value (and, therefore, income payouts) over time.

An IFA, in contrast, lacks these characteristics. Because the plan participant exchanges assets for lifetime fixed payments, the IFA carries inflation and annuitant mortality risks. IFAs can be structured to address these risks but at the expense of higher fees and/or reducing the lifetime annuity rate. What an IFA does typically provide, however, is a higher rate of nominal income than a GWB. Note, too, that because IFA rates are closely tied to prevailing market interest rates, two otherwise identical retirees could end up with very different payouts depending on the level of interest rates at their respective retirement dates.

GWB vs. IFA: A Comprehensive Analysis

Our white paper  analyzes the comparative benefits of GWBs and IFAs using historical data and Monte Carlo simulations.

In all cases, the IFA provides greater lifetime income. However, because the IFA requires the surrender of assets while the GWB account holder retains their annuitized assets, the GWB solution has a higher total value (income received plus current account balance) for a participant until some future break-even date. This break-even age will vary depending on the annuitized assets’ investment allocation and performance. Of course, annuitant life expectancy will determine if that breakeven age is reached.

The historical analysis showed that the hypothetical lifetime total value of the GWB far exceeded the total income payments of the IFA. This is a product of the remarkable financial market returns of the last 20 years. To be clear, we don’t claim that the next few decades will mimic prior ones. However, it is instructive that the GWB retains market upside and potential increases in the annuitized payout over time while guaranteeing that income cannot fall below the initial amount.

In our Monte Carlo simulations, the median break-even point between GWB and IFA solutions was age 87. That is, the median total value of the GWB was higher than accumulated IFA income up to age 87 but less thereafter. It’s important to mention that only 50% of 65-year-olds will reach 87. Note that with all but the lowest starting account balances and worst simulated market outcomes, assets remained in the GWB upon death/at the end of our simulation period — assets that can be used for bequest. It’s also worth pointing out that the GWB is the only solution that meets participants’ stated preference for control over the annuitized portion of their accounts. Because the annuitant retains their assets, they can change their mind or adjust their retirement strategy if they desire to do so.

Control and Market Optionality vs. Higher Immediate Income

Investing and insurance are complex subjects; evaluating competing income solutions for retirement plans is an unenviable task. We recognize that no single solution is right for all plans and times. The white paper  is an attempt to provide a framework for considering the relative value propositions of the two approaches discussed here. We have tried to show that the default assumption that the IFA is “better” because it pays higher immediate income is questionable at the very least. We would argue the key takeaway is that while no one knows what markets will do, we know with certainty that one approach requires participants to surrender assets while the other does not. This distinction is crucial in solving for all the other things participants want — control, liquidity, bequest, etc. Further, historical analysis and 30 years of simulated market returns show the tremendous potential value of retaining the GWB’s market optionality.