According to a recent study, more and more workers are expressing an interest in adding annuities to their defined contribution plans from work. A whopping 80% of survey participants said that they would like to put some, or even all, of their money into annuities. Currently, many companies do not offer annuity choices within their employer-sponsored plans. The survey also found that some are still hesitant about annuities, but the majority of these workers are those who are close or already in retirement and lucky enough to benefit from a corporate pension, which are becoming more and more rare.
“There’s still a relatively large percentage of people at or near retirement and defined benefit income and Social Security, so their need for them for a third annuity is much less,” said Craig Copeland, EBRI senior research associate director, in a recent InsuranceNewsNet article.
Despite the obvious interest, employers also remain hesitant about annuities. Those putting up the most resistance include companies who want assurances in the face of fiduciary responsibilities, employers who offer a corporate pension, and employers who prefer that income be handled outside the plan. Demand for an extra layer of income from an annuity is expected to pick up once employees who have worked their whole lives and set aside part of their salaries in 401(k) and 403(b) plans start nearing retirement.
“It looks like we are getting there but there are still a lot more people comfortable with their cash and investing that cash on their own,” Copeland added. “We will start to get there but it still hasn’t happened yet.”
The survey was conducted in January and included 1,002 current workers, as well as 1,040 retirees. Interesting findings from the study include:
- 21% of plan participants say they will use their plan money to buy an annuity or a product that guarantees monthly income for life.
- 48% of workers report being very or somewhat interested in annuity products compared to fewer than 20% of retirees.
- 31% of defined contribution plan participants say they don’t know whether they will roll their 401(k) money into an individual retirement account (IRA), keep it in their employer-sponsored plan or simply cash it out.
When compared with the bounty of 401(k) investment choices available to help workers accumulate wealth, far fewer in-plan annuity choices are offered to help with asset de-accumulation and turning assets into income. Many industry experts are calling for company plans to expand lifetime income choices as the first wave of workers who will rely solely on their retirement plan contributions move into their mid-50s.
The survey also found that almost ⅔ of workers say they feel confident or somewhat confident in their ability to retire comfortably. While it’s great that many are feeling optimistic, unfortunately, this might be false hope. Many soon-to-be retirees are expecting to earn income from working in retirement, but the experiences of actual retirees reveals a big gap. Nearly 70% of workers expect income from work to be either a major or, at least, minor source of income in retirement, but only 26% of retirees say it actually is for them. Workers often overestimate the amount of income they will earn in retirement. Older workers often find it challenging to earn a decent wage because they may be too expensive, require too much retraining or suffer from a disability that reduces productivity. The false assumption that generating future income in retirement will be achievable is why many advisors recommend that people use annuities to cover basic retirement expenses.
Written by Rachel Summit
