Participants Are Shunning Annuities
Asked what they will do with the savings in their employer-sponsored retirement account when they retire, only 11% of participants surveyed for a report by AB (formerly AllianceBernstein) said they would buy an annuity. At the same time, one-third selected a “steady stream of income in retirement” as the quality most important about saving for retirement, according to the firm’s “Inside the Minds of Plan Participants.”
Tim Walsh, senior managing director at TIAA, has previously said there is more flexibility with in-plan annuities than participants or plan sponsors think. “In-plan annuities are really hybrid annuities. They act like mutual funds during the saving years, but when a participant retires, he has the option to annuitize; it’s not mandated to annuitize,” Walsh said. “When participants get to retirement, their plans may have changed, so flexibility is important.”
Walsh also pointed out that 403(b) plan participants—who more likely have in-plan annuity options than do 401(k) plan participants—typically only annuitize part of their benefits. This addresses the issue that participants do not want to lock up all of their assets. 403(b) plan participants invest in annuities, but they can decide whether or not to annuitize their savings at retirement. “A diversified income strategy that includes partial annuitization, systematic withdrawals and Social Security benefits is the best combination for meeting daily expenses, emergency expenses and leaving a legacy in retirement,” Walsh said.
According to the 2022 edition of MetLife’s “Paycheck or Pot of Gold Study,” nine in 10 pre-retirees feel it is valuable—i.e., very important or absolutely essential—to have a guaranteed monthly income in retirement to pay their bills. Nine in 10 pre-retirees (89%) also said they were interested in an option that would allow them to have both a monthly retirement “paycheck” that would last as long as they, or their spouse/partner, live and access to a partial lump sum of their retirement savings to spend however they want. When pre-retirees were asked which they would choose, though, 82% opted for the annuity—the monthly retirement paycheck—over a lump sum that would give them all of their retirement savings at once but could potentially run out.
AB’s study reports that people misjudge the pace at which they can draw down their assets in retirement. Nearly half (48%) said they think if they had a $500,000 account balance, they could withdraw 7% or more each year and not run out of money in their lifetime. Another 28% said they could withdraw from 4% to 6% each year.
One in three retirees (34%) who had taken a lump sum from their defined contribution plan had depleted it in five years, on average.
A 4% withdrawal rate with annual inflation adjustments has been considered a safe withdrawal rate for years. It became the standard when financial planner Bill Bengen first demonstrated in 1994 that the 4% withdrawal rule had succeeded over most 30-year periods in modern market history. However, recent research from Morningstar found that a 3.3% starting withdrawal rate is more sustainable given today’s low bond yields and high stock valuations.
Meanwhile, MetLife’s study found that one in three retirees (34%) who had taken a lump sum from their defined contribution plan had depleted it in five years, on average. This is more than in the company’s inaugural study, in 2017, in which 20% of retirees who took the lump sum depleted it, on average, in 5.5 years.
In comparison, nearly all annuity-only retirees (97%) said they use their DC plan money for some type of ongoing expense such as day-to-day living or housing, and 94% agreed that receiving annuity payments makes it easier for them to pay for basic necessities. Further, 95% said that receiving monthly annuity payments makes them feel financially secure. In fact, virtually all annuity-only recipients (96%) said they are happy they chose to receive the paycheck from their DC plan.
Most retirees (80%) and pre-retirees (74%) reported having received some form of information about what to do with the balance of their DC plan when they retired. The majority of retirees indicated the amount of information they had available at decision time was just right (77%)—especially those who had an annuity only (87%), vs. an annuity/lump sum hybrid option—compared with 63% of lump-sum retirees. Pre-retirees generally said the information they have received is “just right” (69%) for their needs. Still, 21% said it has been too little.
Both retirees and pre-retirees (89% and 94%, respectively) said they think it would have been/would be helpful if plan sponsors were required to provide an annual lifetime income statement showing employees how much monthly income they can expect their DC plan account balance to provide in retirement.
Participants will get their wish this year, as the Setting Every Community Up for Retirement Enhancement—aka SECURE—Act and subsequent Department of Labor regulations require plan sponsors to begin providing such statements. Notable for advisers: Participants will need education and help to understand the projections and how to use them in retirement planning.