Among economists, there is consensus that lifetime income solutions in the form of annuities offer exceptional protection against retirees outliving their savings.
Americans also recognize the importance of having a secure source of retirement income they can't outlive. TIAA's 2017 Lifetime Income Survey found that given a choice between receiving a $500,000 lump sum at retirement or getting $2,700 a month for life, 62% of non-retired Americans would choose the monthly income.
In light of this, economists and policy analysts have long wondered why the use of annuities is not more common. This is something we've considered, too, since we have seen how a systematic focus on lifetime income has led to much healthier and sustainable outcomes than strategies that focus on accumulation alone.
Some of it might have to do with what is offered through employer-sponsored retirement plans — after all, that is how a majority of people prepare for retirement. Plan rules can play a major role in helping — or deterring — participants from opting for guaranteed lifetime income as a distribution.
Many plans require an "all-or-nothing" or "now-or-never" decision when deciding to opt for lifetime income. For many participants, when confronted with an irrevocable decision, it's easier to go with the status quo — a lump-sum distribution. The potential benefit of a lump-sum distribution rolled over to an individual retirement account is the opportunity to decide later if, when and how much of savings to annuitize. On the other hand, the potential financial advantage of purchasing an in-plan annuity is lost — an annuity bought later will be purchased in the retail market, where fees and expenses often are significantly higher.
We believe that if people had an opportunity to "test drive" an annuity payout for a limited period of time and become accustomed to its features, they would be more likely at the end to choose it permanently.
The industry has seen how automatic features such as auto enrollment and auto escalation have helped drive success in expanding retirement plan participation and savings. There's good reason to think similar behavioral strategies could be applied to the payout, or draw-down phase of retirement, as well. The key is to remove perceived barriers.
By giving participants access to flexible income strategies, plan participants get to test out the benefits of lifetime income payments without having to make an immediate, irrevocable decision with all of their assets.
With increased reliance on defined contribution plans, an important challenge facing the U.S. retirement system is how to help retirees manage the risk of outliving their assets.
Annuities are a force for innovation and a much-needed, potential solution to the growing retirement deficit. We believe providing access to flexible income distribution options can help remove barriers and help participants learn more about how workplace retirement plan savings can be transformed into income for life.