Where Do Annuities Fit In?
Just where do annuities fit in the expectations of American workers who participate in defined contribution plans such as 401(k)s?
New data from LIMRA Secure Retirement Institute (SRI) says that 14 percent of private sector employees who participate in such plans expect that some of their retirement income will come from annuities. In the not-for-profit sector, it’s 13 percent.
By comparison, 79 percent of participants in the private sector and 76 percent in the not-for-profit sector think their defined contribution (DC) plan will be a source of retirement income.
Clearly, workers have much higher expectations concerning their DC plans’ role in retirement in comparison to annuities. This might be what most annuity professionals expect.
But how to interpret this gap? It’s bigger than annuity professionals might expect. In both sectors, the DC plan ranked first as an expected source of retirement income while annuities ranked last.
In between were several other expected sources. In declining order, these were: Social Security, personal savings, individual retirement accounts, part-time work, full-time work and pensions.
So, even full-time work is an expected source of income before annuities among DC plan participants. In the private sector, for example, 26 percent identified full-time work as a source of income; in the not-for-profit sector, 24 percent said the same.
The good news is that most employees are saving for retirement via their current employer’s DC plan —77+ percent in the private sector, and 73+ percent in the not-for-profit sector. (The percentages vary by plan size and employer type.) Some indicated that they are expecting retirement income to come from a traditional defined benefit plan too.
The annuity stats must be a bit discouraging for annuity professionals. No one wants their product to come in last place on any consumer ranking.
Some of the gulf may be a matter of presence. Workers who participate in DC plans are seeing the contributions taken from every paycheck. That is an ever-present reminder of being “in the retirement plan at work.” In addition, they may get other reminders from regular employer notices and periodic chats with coworkers about their plans.
With annuities, such reminders are slim pickings. Some consumers do buy their annuities on an auto-pay basis from their checking accounts, so they do see the money move, of course. However, they don’t have the reinforcement that comes from employer notices or jam sessions with coworkers. They typically don’t get regular messaging about annuities, either, from insurers or advisors (with some notable exceptions).
The DC participant profile may be a factor too. According to LIMRA SRI, the participants have an average DC plan tenure of nine or 10 years and a median DC plan balance of roughly $57,000 (private sector) and $50,000 (not-for-profit sector). Only a limited few claimed to be “very” knowledgeable about investments or financial products (12 percent and 7 percent, respectively).
In view of that profile, some participants might find it hard to see their way clear to buying an annuity. They may believe the DC contributions are all they can squeeze out.
Well, it may be hard, but it’s not impossible. The researchers found that 59 percent of plan participants in the private sector agreed that “financial professionals provide value beyond what I could achieve on my own.” In the not-for-profit sector, 53 percent said the same. This suggests that at least some plan participants might be receptive to guidance from an advisor.
Such guidance might lead to an annuity discussion, especially about fixed annuities. After all, 37 percent in the private sector (and 42 percent in the not-for profit sector) describe themselves as having no or little risk tolerance.