“When you had DBs, you didn’t need annuities, but DBs are gone,” said Harris, the former chief economist and economic advisor to former Vice President Joe Biden. “The 401(k) system arose by accident. It was never designed to be what it is today, and like a lot of policies that arise by accident, there are problems with it.”
As defined benefit plans are phased out, defined contribution options are taking precedence.
From 1980 through 2008, the proportion of private wage and salary workers participating in pension plans fully funded by their employers fell from 38 percent to 20 percent, according to the Bureau of Labor Statistics. That’s compared with an increase from 8 percent to 31 percent of workers whose contributions are matched by an employer in a retirement account owned and controlled by the employee.
“The first generation of defined contribution investors is approaching retirement right now, and lack of clarity is creating anxiety,” Finke said. “You don’t know how many years to fund or the rate of return you’re going to get, and there’s always going to be a chance that it will run out.”
Most retirees will need 70 percent of their preretirement earnings to comfortably maintain a preretirement standard of living, according to the Social Security Administration, which means they will need other sources of income.
“Many Americans live paycheck to paycheck, so accumulation obviously is a critically important part of the equation,” Stowe said. “But ultimately, what gives people the most security, the most freedom, freedom from worry and freedom to pursue their interests in retirement is a guaranteed income.”
However, the sales of annuities have been struggling of late as financial advisors are increasingly seeing their trailing commissions cut on the sale of variable and fixed-annuity contracts. In 2017, total annuity sales decreased 8 percent from 2016 to $203.5 billion, according to the LIMRA Secure Retirement Institute’s fourth quarter “2017 U.S. Individual Annuity Sales Survey.”
“No industry is perfect, and our industry has an enviable track record providing security,” said Stowe. “Even in instances where companies may look back and realize they didn’t get the pricing right, you don’t see situations where consumers get disadvantaged. You see shareholders or advisors but not consumers, and ultimately that’s the most important relationship.”