One of the paradoxes that retirement specialists are trying to solve is how to satisfy an investor demand for guaranteed income in retirement even though consumers are seemingly put off by annuities.

And consumers do indeed want some kind of base guaranteed income, says Michael Finke, a professor at the American College of Financial Services. In a recent paper Finke wrote with Jason J. Fichtner, vice president and chief economist at the Bipartisan Policy Center, the two found that 81% of respondents in a survey of plan participants said they were either somewhat or very likely to prefer a retirement plan that puts guaranteed income on the table. And most of the respondents said they wanted a mix of investments or lifetime income rather than a traditional pension or investments alone.

“I think what was most interesting to us was the general consensus among participants that they want a blend of both and they don’t prefer the old system of a pension,” said Finke in an interview with Financial Advisor. “I think what a lot of people believe right now is that we used to have a better system when we had a pension. Today’s employee says, ‘Actually, I like having some money in an investment account, but I also want to have part of that money be in the form of a lifetime income. Some blend of the two is what’s going to make me the happiest.”

The white paper that has emerged from the survey (under the auspices of the Alliance for Lifetime Income’s Retirement Income Institute) is called “Participant Attitudes Toward Guaranteed Income in a Defined-Contribution Plan.” As part of the study, the alliance sent out a 25-question survey to DC plan participants in September and October of 2020. The questions were sent through a record-keeper serving plans in different industries and reached people of different ages and wealth levels.

Careful Language
Among the questions the alliance asked participants was how much they would want to allocate to stocks and bonds after retirement and what would their choice be if they could buy a lifetime income stream, even if that meant handing over a portion of their money to a financial services company that would never be paid back.

The survey designers were careful to use the word “lifetime income” and any products that might follow that definition.

“We don’t use the ‘A’ word in the survey,” Finke said. “Because annuities—obviously there are a broad range of financial products. People have different perceptions of the product itself.”

“To better understand whether workers prefer to allocate a portion of savings to an income annuity,” said the authors in the white paper, “we develop questions that elicit preference for a hypothetical retirement portfolio that contains stocks, bonds, and an income annuity. We evaluate preference for annuitization using current annuity income quotes, but also provide information about the opportunity cost of failing to annuitize by demonstrating the probabilities of outliving assets and the income that could be produced from bond assets.”

Finke said there was a question in the survey that asked people what was most important to them in their retirement savings plan, and the answer given most often (by 31% of the respondents) was that they want to understand how much they can spend from their savings that they have. The next closest answer was that they wanted the potential for growth (named by 23%), and the third most common answer was that they didn’t want their assets to fall during a market decline (named by 22%).  

He said that risk tolerance goes down as people get closer to retirement. “If things go south, or if they feel like they don’t understand how much they can spend, that creates a certain amount of anxiety that may have not existed for them when the market fluctuated when they were in their 30s and 40s.”

The desire for a blend of guaranteed income and investment accounts rose with age, he said. “Among those who are 55 and older, only 15% preferred investments alone; 16.7% preferred a pension, 68.2% preferred a blend of the two. Which tells me that as people get closer to retirement, they value some form of guaranteed income more.”

When asked how interested they would be in having the ability to buy additional lifetime income within their retirement plan savings, 24% said they were highly likely and 61% said they were somewhat likely, the study said.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2020 made it easier for plan sponsors to add annuities to retirement plans with safe harbor provisions, and that’s raised the prospect that plan sponsors and consumers will overcome their wariness of these products, which will find more acceptance in the DC world.

Many people are not actively managing their retirement portfolios with any sort of guidance, Finke says, and if more income options come into annuities, there will likely be an education gap to overcome.

“I think there’s two ways it’s going to happen,” Finke said. “One is through what’s known as managed accounts. There exist many types of managed accounts today in the defined contribution space where an expert will help a participant customize their portfolio to fit their specific needs. And the one thing that really hasn’t been in managed accounts is the desire for lifetime income. And I really hope that in the future we’re going to see more plan sponsors adopt options that give employees at least the alternative or ability to incorporate guaranteed income into their retirement plan.”

The other thing needed is a default structure that would put clients into a lifetime income structure that they could opt out of, he said. “A default that looks like what the academics say is optimal, which is a partial annuitization approach, [means] they are probably going to be better off—they are going to end up in something that’s going to make them happier.”