LIMRA’s Secure Retirement Institute recently asked workers with defined contribution plans where annuities fit into their future retirement financing. Insurance News Net’s Linda Koco summarized the results in her article “Where Do Annuities Fit In?” Workers were asked where they expect their retirement income to come from and annuities ranked last on their list. More than 3/4 of workers in both the private and not-for-profit sectors expect some of their retirement income to come from their defined contribution plans. Annuities fell on the other end of the spectrum. Only 14% of private sector workers and 13% of not-for-profit workers expect some of their retirement income to come from annuities. The other expected sources between the highest and lowest were Social Security, savings accounts, IRAs, part or full time work and pensions.
The question that annuity professionals need to ask is why there is such a gap between expected income from annuities and expected income from defined contribution plans. In the private sector, 77% of employees are saving for retirement using their company’s defined contribution plan. It’s a little lower in the not-for-profit sector where 73% of employees save using the company plan. The anticipated increase in defined contribution plans offering annuities to provide a lifetime income stream will probably increase the number of workers who expect some of their retirement income to come from annuity products. The industry anticipates this increase after regulation changes last year made it easier to offer annuities within defined contribution plans.
When workers put money into a workplace retirement plan, they are constantly reminded through paycheck stubs, employer notices and even questions from coworkers about their retirement plans. People don’t usually receive those kinds of reminders with annuity products, so they simply might not be at the forefront of people’s minds. Another reason that defined contribution plan participants aren’t thinking about annuity products is their demographic. The majority of those questioned said that they were not “very knowledgeable” about financial products or investments. But almost 60% of those in the private sector believe that a financial professional can help them add more value to their financial plan than they can add on their own. There is a definite need for annuity professionals to spread knowledge about their ability to create lifetime income during retirement. Since more than 2/3 of respondents have little to no risk tolerance, fixed annuities could be the right product for their financial plan. It’s important for the annuity industry to educate consumers, especially those participating in defined contribution plans, and bridge the gap between expected annuity income and DC plan income for retirement.