Lifetime income solutions can help millions better manage the spend down challenge in retirement, but a new study finds that these instruments still have not been widely embraced by consumers or plan administrators.
According to the study, “Lifetime Income to Support Longer Life: Retirement Innovation and the New Age of Longevity,” by the Stanford Center on Longevity produced in collaboration with Principal Financial Group, only 7% of retirees and pre-retirees are counting on annuities to be an important part of their retirement portfolio. By contrast, it finds that respondents plan a much higher reliance on Social Security (64%), personal savings and investments (38%) and employer-sponsored 401(k) or 403(b) plans (35%).
The paper suggests that this low adoption rate can be attributed to several factors, including that:
- consumers may not see income annuities as simple or easy to understand, or perceive them as more expensive;
- consumers don’t want to take a chance of losing money by putting it in an annuity and possibly dying before getting their money back;
- financial professionals are still warming up to annuities and may lack understanding of how they work and may not position them with clients; and
- few sponsors of DC plans currently offer guaranteed lifetime income options in their plan’s lineup.
Plan Sponsor Buy-in
The growth of annuities as a core part of a retirement portfolio has been slowed by the fact that plan administrators currently do not prioritize adding lifetime income features to their plans, the paper suggests. “The influence of plan administrators cannot be overstated, because their decisions on what to include in their plans and how to channel plan participants are far more often than not decisive of how tens of millions of Americans plan their retirements.”
In 2019, only 2% of companies identified “supporting the process that enables participants to convert account balances into lifetime income” as a top priority. And in 2020, a relatively low percentage of companies reported that they currently had lifetime income options:
- 17% have some form of managed income solution (like a target payout fund);
- 9% have an annuity option within the plan; and
- only 11% facilitate third party annuity solutions outside of the plan.
Furthermore, the vast majority of companies—more than 75% in each case—reported that “it is not at all likely” that they will offer such solutions in the future. Among the “major reasons” that companies cite why they do not currently offer income solutions include:
- fiduciary concerns (60%);
- operational or administrative concerns (52%);
- waiting to see the market evolve more (50%);
- cost barriers (30%);
- difficulty with participant communications (29%);
- participant utilization concerns (28%);
- not interested in making plan enhancements for terminated participants (21%); and
- preference that participants leave the plan upon termination (5%).
Unsustainable
According to the authors, the reluctance of companies to emphasize lifetime income solutions may be understandable, but it may not be sustainable. The study notes, for example, that the average American turning age 65 today can expect to live 40% longer than someone who turned 65 in 1950. Moreover, the number of Americans retiring every day has more than doubled over the last 20 years, and the dislocations and loss of jobs among older workers, cause by the pandemic is likely accelerating retirement for many.
“There’s been a significant improvement in life expectancy over time,” says Sri Reddy, senior vice president, Retirement and Income Solutions at Principal. “At the same time, many retirees are significantly underestimating how many years they’ll spend in retirement. This uncertainty, combined with variables including declining pension benefits and rising costs, can make it difficult to plan for spending one’s assets in retirement.”
And while innovations like auto-enrollment, auto-escalation and the growth of target date funds have helped many Americans save for retirement, many find themselves at retirement with little to guide them on how to spend down their retirement savings, facing a wide variety of decisions and few ways to protect themselves if their retirement lasts longer than average.
To that end, the paper suggests that plan sponsors should take this need into account as they assess providing new functions for their plan participants.
“With the passage of the SECURE Act last year, we took an important first step towards creating a framework for guaranteed retirement income solutions,” Reddy emphasizes. “This study shows us there is a real need for industry, plan sponsors, financial professionals and policymakers to collaborate at new levels to increase access to lower-cost income annuities and similar lifetime income solutions so American workers may have a more secure retirement and more confidence that they will not outlive their resources.”
