Prudential Financial recently released a report about the use of annuities in retirement plans, entitled “The Ease of Automation and Guaranteed Retirement Income.” Research for the study was performed last summer on full time workers who had access to a defined contribution retirement plan of some sort. Insurance News Net’s Cyril Tuohy summarized the findings in the article “Study: Annuities Sell Themselves if Promoted.” It’s hard to believe that only 4% of defined contribution plans offer annuity options to help employees guarantee lifetime income in retirement. There are 35,000 plans using annuities in them, but exponentially more who do not offer this important option.
In order for more companies to start offering annuity options in their defined contribution plans, information about the importance of annuities has to be communicated to employees. This job lies not only with plan sponsors, but with insurance companies, brokers and advisors as well. Employees have to understand the benefits and importance of annuities so that they are more widely accepted and offered in retirement plans. Employees who know these benefits are the ones who opt to use the annuity option in their plan and ask for this option to be made available if it isn’t already. Satisfaction with retirement plans increases significantly when a lifetime income option is available for employees.
Researchers found that more than 3/4 of retirement plan participants know about their guaranteed lifetime income options and think they’re very important in employer sponsored plans. They also said that they would choose an annuity option if it was available in their plan. The generation most excited about these annuity options would definitely be Millennials. They are also fond of automatic plan features like auto enrollment and auto escalation. Despite the responses received in this research study, many workers are just not making good use of the benefits available to them.
This report, which was the fourth in a continuing series of white papers, suggested some important ways that plan sponsors can help their employees. They have to work with insurance companies, brokers and advisors to help increase annuity interest in retirement plans and increase the overall success of each employee’s finances in retirement. First of all, there should be more automatic enrollment and automatic escalation. These auto features should be used in conjunction with default guaranteed lifetime income solutions. Plan sponsors must also make employees understand that default and automatic features are not there to take away their control, but rather to maximize their plan’s potential. When talking about diversification and asset allocation, plan sponsors should include annuity options as well. Finally, use re-enrollment for not only new employees, but also for existing employees.
Employees have to understand that they are paying more for annuities because they offer guaranteed lifetime income that is backed up by an insurance company. Other options, like index funds, do not guarantee the same. Guaranteed lifetime income from your retirement plan is the best way to maximize your financial outcome during retirement. Plan sponsors have to relay the importance of in-plan annuity options to their employees to help them achieve financial success in retirement.
Written by Rachel Summit