A major change could be coming to your 401(k). According to CNBC Make It, mutual fund companies are expanding access to a new type of investment designed to provide lifetime financial security.
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These funds would allow shareholders to use a portion of their retirement savings to purchase an annuity — an insurance product that guarantees the policyholder a set amount of income over a specified period.
Here’s how experts say it could affect retirement planning.
Target-date funds are mutual funds that hold a variety of assets, typically stock and bond mutual funds, that automatically adjust over time and become more conservative as you near retirement, or a specific “target date.”
They are designed to function as all-in-one retirement portfolios, simplifying long-term investing. They are also a primary investment option in workplace retirement accounts. According to the Plan Sponsor Council of America, more than 30% of 401(k) assets were invested in target-date funds, CNBC Make It reported.
Vanguard, one of the world’s largest investment companies, recently announced a new line of target-date mutual funds. Other financial and insurance firms, including BlackRock, also offer funds with built-in annuity options.
According to The Wall Street Journal, these mutual funds will become available in 2026 and will be offered only within defined contribution plans.
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“Many people want the security of an annuity, but annuities have historically had no tax advantage, making them a less attractive option than a 401(k) or IRA,” said Melanie Musson, finance expert at Quote.com. “With the option of turning a percentage of retirement funds from a 401(k) into an annuity, investors approaching retirement can take advantage of the tax advantage of a 401(k) and the security of an annuity.”
But will the option of an annuity revolutionize retirement? Probably not, Musson claimed, emphasizing that annuities aren’t the best option for most people.
“Despite not making sense on paper, many people prefer annuities because they provide a guaranteed income, and people want that security,” she added.
Also, you still have to contribute to your 401(k) to take advantage of this annuity option.
“Any time you invest in your retirement account, it’s a good thing, so if the annuity option motivates you to invest more, that’s a win,” Musson said.