Studies have shown that Americans can benefit from guaranteed income products (GIPs) in their retirement portfolios, but they are faced with a maze of complex product choices from an industry with regulatory and legal challenges.
In a new report, entitled “Are There Enough Annuities?" Morningstar laid out the challenges the industry faces in trying to encourage more Americans to “gipify."
Single-premium-immediate annuities (SPIAs), deferred-income annuities (DIAs) and fixed-index annuities, which provide investors with a fixed return or a percentage of the return of an established market index such as the S&P 500, are just three examples of what the mutual fund data provider calls GIPs.
Morningstar is one of several major financial information companies eager to find ways to increase Americans' use of retirement income products like annuities even though it has little direct interest in the product. Another is BlackRock, the nation's largest asset manager, whose executives have voiced concerns about American retirees underspending when they stop working. BlackRock doesn't sell annuities, although it does act as a sub-advisor for several variable annuity providers.
“Retirees with more guaranteed income tend to spend more,” Morningstar said. In fact, research shows that those with GIPs spend about three-quarters of their incomes, while those who rely heavily on non-guaranteed sources of income and investments spend about two-thirds of their incomes.
“We think that people spending more money are likely happier than those fearfully holding on to their assets before they die. Individuals value flexibility in retirement spending, which phased withdrawals provide,” Morningstar wrote, while noting only a piece of any investor’s portfolio should be “gipified.”
Phased withdrawals, however, do not protect against longevity risk or the uncertainty about how long someone will live, the firm stated. “The combined solution of offering GIPs within DC [defined contribution] plans, which would distribute wealth between annuities and phased withdrawals, has many benefits. Offering this type of annuitization within DC plans provides an alternative option for individuals who are averse to full annuitization,” the financial services and research firm wrote.
In reality, however, fewer than 5% of American families held an annuity in 2019, according to the Investment Company Institute.
“One of the key reasons why GIPs are not widespread is their lack of availability in employer-sponsored plans. According to the Plan Sponsor Council of America’s 63rd Annual Survey of 600 plan sponsors, less than 10% of employer plans offered an annuity option in 2019,” Morningstar said.
The complexity of the product, exacerbated by the lack of standardized regulation, add to low adoption rates, the company said. At various junctures over the last 20 years, some insurers have discussed "federalizing" regulations to enhance standardization, but the discussions encountered blowback within the insurance industry.