Actually, the issue is perhaps more basic than a decumulation strategy. The report – by Cerulli Associates – based that conclusion on a survey that merely asked 401(k) investors who were at least 45 what they planned to do with those savings when they retired. In response, a quarter said they didn’t know, and another quarter said they planned to consult with an advisor – an alternative that Cerulli characterized as “a marginally more prepared version” of the same response.
I’ve long noted that while workers love pensions, they hate (or are at least ambivalent about) annuities – and while there’s a bit of hyperbole there, at least as things stand today, writ large, plan sponsors still seem to be keeping retirement income options at arm’s length – and by that I mean outside the plan’s distribution options. Participant interest and takeup is even less enthusiastic – which only serves to affirm the plan sponsor reluctance.
And yet the reality is that when actually given the choice (and in fairness, most DC plans don’t offer anything remotely resembling a true retirement income option), the vast majority of participants don’t avail themselves of the option. Even those in defined benefit plans seem inclined to “take the money and run” given the chance.
Here are some thoughts on why – and what might have to change.
They don’t know how much they’ll need.
For more than 25 years, the nonpartisan Employee Benefit Research Institute (EBRI) has, in its Retirement Confidence Survey, chronicled just how few individuals have even hazarded a guess as to how much income they will need in retirement.
Let’s face it, if you don’t know how much you’ll need, it’s pretty hard to get comfortable that the amount you’re quoted as a monthly payment amount will be “enough.”
They don’t know how much they can get from what they have saved.
Back in May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance.
That proposed rulemaking hasn’t gone any further, although a number of recordkeepers have undertaken to provide an estimate on statements based on certain assumptions. What that means today is that some participants at least have the opportunity to get at least a rough approximation of what their current balance might produce in terms of monthly income. Some have gone so far as to project what that might look like at retirement age.
But that’s not all participants, or all plans – and it’s generally limited to a projection based on the balance on that particular recordkeeper’s platform. And for some at least, it’s perhaps a disquieting number.1
They’re afraid they’ll lose out.
Perhaps the most common aversion workers have to committing to retirement income is the pervasive sense that they’ll hand over this big lump sum – which is for many, the most money they have seen in their lives, a sum they may have spent their whole career accumulating – to some large insurance company, and then run out of life before they get (all) their money “back.”
Though the alternative – running out of money before you run out of life – is surely no less disconcerting.
There are some “reframing” alternatives to this behavioral finance impediment – things like allowing workers to buy into the annuity over time, rather than all at once, and studies have suggested that a consumption framework (rather than a focus on investments and return) might have an impact.
They’re afraid that the annuity provider will go out of business.
The annuity industry is quick to point out that this has never happened, that the industry has a robust state oversight structure, and that in the unlikely event that at some point in the distant future, if the firm you’ve chosen to do business with does fall upon hard times, there’s a good chance that other firms would, as part of a managed reorganization, pick up the pieces (including your monthly payment).
They feel like it’s “all or nothing.”
For participants, the annuity decision has traditionally been presented as either/or; either take a lump sum, or take that lump sum in the form of an annuity. Enter Qualified Longevity Annuity Contracts, or QLACs.
Though widely touted as a viable alternative by regulators, the take-up rate on the alternative to “all or nothing” appears to be largely in the latter category. Arguably, the lack of availability in workplace retirement plans isn’t helping any – and for some, if trying to figure out the “right” answer for a monthly payment can be complicated, figuring out how much to do as a partial solution is likely to be almost as much of a problem.
It’s (really) complicated.
The good news is, there are a lot of options when it comes to buying an annuity. The bad news is, there are a lot of options when it comes to buying an annuity.
There’s little question that participants need help structuring their income in retirement – and little doubt that a lifetime income option could help them do that. That said, the biggest impediment to adoption may simply be that (industry surveys notwithstanding) participants don’t seem to be asking for the option. And when they do have access, most don’t take advantage. Even when DB plan participants have a choice, they opt for the lump sum.
Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments, be it the overweighting of small probabilities, mental accounting – or simply the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.
They don’t know how to find help.
As an industry, we bemoan worker inattentiveness to the sufficiency of their retirement savings accumulations – and that’s with the aid and assistance of workplace retirement savings education, defaults for decisions like contribution amount and investments, and increasingly the availability of a retirement plan advisor.
Let’s face it: When it comes to making a decision about a lifetime income option, or even evaluating the option, most workers are – still – literally on their own.
- Nevin E. Adams, JD
Footnote
- While the so-called “common wisdom” might be that participants might be put off by the small numbers, in its 2014 Retirement Confidence Survey, EBRI found that, presented with a projection based on their balances and assumptions similar to those proposed by the Labor Department at the time, more than half (58%) thought that the illustrated monthly income was in line with their expectations. ↩
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