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June 22, 2011 |
Financial Advisors' Friend Or Foe? |
Most workers in the UK annuitize their lump sum payouts on retirement and thus they are assured with more certainty they will not outlive their assets. A January study by the Society of Actuaries found only 20% of Americans plan to annuitize their assets on retirement.
In a time when the sufficiency of Social Security payments (let alone its solvency) is a big political football, the potential for retirees and their spouses to ensure their future well-being through annuities stands out as a potential bright light.
But obstacles remain, not the least Americans' fear of annuitizing: When a 65-year-old, say, is suddenly given a windfall payout of $250,000, the prospect of giving a good portion of that to an insurance company for the assurance of receiving $20,000 a year of guaranteed income may not seem to be such a great idea.
That reluctance is exacerbated by individuals' tendencies to think they can invest better than they do, especially if they retire during bull markets and exacerbated by their conflicting desires to provide an inheritance for their loved ones.
An additional problem is that employers who offer defined contribution plans have almost no incentive to provide annuity options within their defined contribution or distribution plans; in fact they have some perceived fiduciary disincentives, says Craig Rosenthal, a partner and senor consulting actuary at benefits consultant Mercer LLC. Rosenthal wrote a report--Retirement, Risk & Financial Perspective: Desperate Households to bring attention to the problem.
Part of the incentive in bringing attention to this problem is a Department of Labor proposal that would require retirement portfolio statements to report how long the money the employee has accumulated can be expected to last. For instance, in a response to the proposal, MetLife noted that "among the most disturbing findings of [a] 2008 study was that 60% of Americans underestimated their average life expectancy, 49% underestimated the amount of pre-retirement income they would need upon retirement and 69% of pre-retirees overestimated how much they could draw down from their savings."
So, though Rosenthal sees a clear need for companies and plan sponsors to start offering annuity options within retirement plans, he doesn’t think that will happen until there is either regulatory or legislative liability relief for employers. After all, many remember the unexpected implosion of the highly respected Mutual Benefit in 1991, the largest collapse of a life insurer in the United States, a title it only retained because the Equitable Insurance Co. was saved that same year by an equity infusion by French insurer AXA. Employers don't want to find out years later they are responsible if an insurer within a plan goes bust.
Ironically, offering annuity options may be opposed both by mutual fund companies who fear the loss of assets and potentially by financial planners as well. Planners who might expect to take on new retirement clients will instead find some who annuitized their retirement assets and thus have much less complicated needs for planners to solve.
While some planners do have their concerns, not all agree it is a bad thing. "The potential good that comes from this outweighs the bad. In the end, I think the sobering numbers that are produced for many employees who aren't doing enough to fund their retirement will help to focus them. And, ultimately, having more choices is a good thing for the employee," says David Lamp, CFP, in Seattle.
While Lamp sees the potential for conflict, he says, "if we are acting as fiduciaries ... and giving the best recommendation, it shouldn't be an issue. This issue already exists today with clients who have a traditional pension option. Our firm has analyzed two different annuity options for clients who are retiring teachers. In both cases, the annuity option was a better choice than the lump sum. Our firm won't get the lump sums, but it is all a part of providing the best service possible."
Roger Wohlner, a CFP licensee in Chicago, questioned the fees that go along with managing the annuities, fees that can currently work against the interests of participants, an issue Rosenthal also brought up.
But perhaps the biggest problem for retirees is psychological. Faced with the largest windfall of their lives, they're reluctant to leave money on the table. They fear if they die early, all that money that could have gone to heirs goes to waste. Of course, that's the way any insurance product works: Those who die young help pay for the retirements of those who live longer. Whatever the perception, the increasing national conversation about seniors' extended life and retirement shortfalls, as wel as annuities within defined contribution plans, is sure to continue.
—Matt Greco
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Financial Advisors' Friend Or Foe? |
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