One of the themes that emerged from the many academic papers I have reviewed over the years is that economists think highly of immediate annuities. Clients, however, are not buying these products.

Why can one group love a product the other apparently hates? To answer that in just one word, I would choose "perspective." Economists and clients come at the issue from entirely different viewpoints. Academics typically examine macroeconomic and social issues, while clients are more interested in the micro economics of their household.

Economists see a number of trends that can make lifetime income annuities attractive. The most obvious of these is the trend toward longer life expectancies. A 2006 Congressional Research Service (CRS) report to Congress indicated that the life expectancy of a newborn in the United States in 1900 was 49.2 years. The 2003 newborn, by contrast, was expected to live to be 77.5 years old on average. This significant increase is attributable to advances in nutrition, medical, environmental sciences, workplace safety regulations and other factors.

There is great debate within the academic community about whether we will see such dramatic life-expectancy increases in the 21st century. The rate of increase in life expectancy slowed significantly in the latter half of the 20st century. According to Stephen Goss, chief actuary of the Social Security Administration referenced in the CRS report, the emergence of AIDS and SARS are examples of how quickly new diseases and antibiotic-resistant microbes can rise. Goss also asserts that medical advances may not be affordable for the masses and that the population in the U.S. has a tremendous problem with obesity and inadequate exercise. Nonetheless, the vast majority of the research points to longer life expectancies, and lifetime income annuities provide a high degree of certainty that some income will be available regardless of lifespan.

Economists also cite the trend of fewer defined benefit pension plans and more defined contribution plans. My grandfather worked for the Chicago Transit Authority his entire adult life. He collected a steady pension check after he retired for nearly 30 years before he died. These days, it is harder to find either a lifetime employee or a defined benefit plan.

The trend away from defined benefit to defined contribution plans has been under way for 30 years, but the pace of the shift appears to have accelerated substantially in recent years. A Towers Watson study "Prevalence of Retirement Plan Types in the Fortune 100 in 2011," showed a mere 13 companies in the 2011 Fortune 100 offered new hires a traditional defined benefit plan in 2011, compared to 58 in 2000. Further, in 2000, 72 of the Fortune 100 that year maintained a defined benefit plan, while only 30 of the firms on the 2011 list maintain one. These plans are even rarer among the small businesses for which the majority of Americans work.

With the increasing amount of responsibility placed upon the individual worker comes great concern about the lack of financial literacy among the populace. Most of our personal finance education comes piecemeal from friends, family and the school of hard knocks. Personal finance topics are typically sprinkled in the more traditional academic topics. For instance, schools in my community teach compounding interest as just a math problem and ignore the implications on one's personal finances.

In addition, the financial world has become and will probably continue to become more and more complex. I recently received notice that my homeowners insurance premiums were increasing 27%. As I reviewed information from my agent about alternative policies, I was reminded of just how difficult it can be to sort through one's financial matters. I am a highly trained professional with more than 20 years' experience who is familiar with financial terminology, yet it took almost no time for the whole matter to induce a raging headache.

Study after study about the utilization of 401(k) plans show unequivocably that most Americans are not saving enough and not taking full advantage of matching funds offered by their employers. The probable effect of this over time will be a population of workers with relatively small nest eggs.

The studies also show that a significant proportion of workers make poor initial investment choices and if they revisit those choices, they make poor subsequent decisions. The probable effect of this over time will be poor results on top of the inadequate level of savings just mentioned.

With a large segment of the population mismanaging small accumulations, more people will likely rely on government or other societal support than would be the case if they had better-managed, larger accumulations.

Annuitizing retirement accumulations, in the eyes of many economists and sociologists, eliminates many of the above concerns by providing a steady income to those who might otherwise not have one. Such a move would not completely eliminate dependence upon government or private-sector support because citizens can still mismanage a steady income. But by and large, economists seem attracted to the trade-off.

Last year, a fair bit of publicity went to the General Accounting Office after it released a study that said with only about 6% of 401(k) participants taking a lifetime income payment option, it was likely more should consider doing so for a portion of their retirement assets.

Someone who is receiving a secure annuity check cannot outlive their income. They do not have to make decisions about where to invest their funds nor do they need to make subsequent decisions about how to adjust these choices. Their decision-making has been greatly simplified. They need only make decisions about how to spend the income.

Contrast that to the enormous complexities involved in managing a retirement portfolio. I see a constant flow of media discussing an infinite variety of topics such as where retirees can find higher-yielding investments, how one should position their retirement assets, how to manage income taxes on a nest egg, and what a safe initial withdrawal rate may or may not be.

In addition to technical issues, there's an enormous and growing amount of information and suggestions about how to incorporate a retiree's values and psychological traits into their plans. As I mentioned in a prior column about whether clients were ready to retire, a budding community of academics and practitioners is examining what it takes to have a successful retirement in non-financial terms, including happiness, relevance, contentment.

The proliferation of blogs and social media has only added to the volume of information one can be exposed to with respect to retirement. Not all of this information is "good" or useful, and it adds to the potential for client and/or advisor confusion. A steady secure annuity check minimizes, if not eliminates, much of the complexity, anxiety and potential for error that managing a retirement portfolio presents.

One might expect that the perceived certainty of a steady, secure annuity check would be very attractive relative to the uncertainties that come with managing a lump sum. Research seems to support this idea. Work by Bender (2004) and Panis (2003) both find retirees are happier with a defined benefit pension than they are with a comparable amount of wealth in a retirement account.
Yet, few clients buy these annuities. Why?

I'll address several reasons in my next column, but before I end this one I'll mention one of the more popular scapegoats within financial services now.

I often hear people blame compensation policies for financial advisors, consultants or planners as a reason clients don't buy these annuities. As with any business, in financial services some unethical people are not doing what they should for their customers. I have no doubt that compensation plays a part for them, but I'm skeptical that it is as significant a factor as the issues I'll discuss next month.

The basic argument I hear is that advisors will not recommend annuitization because they will no longer have a lump sum on which to charge fees or generate future commissions. Regardless of their compensation method, I see no evidence that the majority of advisors are recommending against paying off high-interest debt, gifting to family or making charitable contributions. Those are just three things that even mediocre advisors routinely and actively recommend to clients that also removes money from an investment portfolio.

The lack of availability to funds affects clients far more profoundly than it does advisors. I'll have much more to say about this lack of availability next month as it is one of many reasons clients reject these products.

Dan Moisand, CFP has been featured as one of the America's top independent financial advisors by most leading financial advisor publications. He has spoken to advisor groups on five continents on topics such as managing investments and navigating tax complexities for retirees, retirement readiness, and most topics relating to the development of the financial planning profession. He practices in Melbourne, FL. You can reach him at [email protected]