Academics Propose Solutions to ‘Annuity Puzzle’

For decades, the question of why the use of annuities by retirement savers remains far less than theoretical demand—better known as the “annuity puzzle”—has perplexed retirement researchers. According to a new working paper from the National Bureau of Economic Research, closing the gap will likely require interventions on both the supply and demand sides. Yet the researchers identified design initiatives, policy developments and behavioral interventions on both sides that can help annuity providers overcome barriers to adoption.

“Creating more effective retirement income choice environments will require coordination among employers, insurers, advisers, regulators and policymakers, even when incentives are imperfectly aligned,” the paper concluded. “No single innovation or regulatory change will reliably deliver the outcomes predicted by idealized economic models. Meaningful progress will instead depend on a combination of education, carefully designed nudges, and continued innovation in products and choice architecture.”

Industry Design Initiatives

Globally, annuity design choices currently span the gamut from voluntary to mandatory, the paper stated. Aside from varied levels of compulsion, annuities differ in many other ways, based on term length, amount paid per year and other factors.

In countries such as Singapore and Israel, retirement systems have required partial annuitization to ensure baseline levels of longevity protection for savers’ assets. However, mandates have also been politically fragile, as illustrated by the U.K.’s elimination of mandatory annuitization in the early 2010s.

To ameliorate some of the issues associated with mandates, systems can adopt default annuitization—as seen in Sweden, for instance—rather than mandated annuitization. In default annuitization, participants, participants are automatically enrolled in an annuity product unless they opt out, rather than being required to remain enrolled. However, defaults can also disadvantage individuals with poor health by making it difficult for savers to consider private information about mortality risk when evaluating annuity options, the paper warned.

In addition, annuity design features can help savers balance flexibility and insurance, according to the paper. For example, deferred annuities that begin payments at advanced ages can preserve liquidity early in retirement, while protecting against poverty in old age. While research has shown that irrevocability remains a major deterrent to annuity adoption, some proposals have offered time-limited trial periods to provide annuitants with greater reversibility of their annuity purchase decision.

Policy Solutions

Given the positive correlation that automatic and default accumulation mechanisms have had on raising savings rates in defined contribution retirement systems—especially among workers with lower financial literacy—the paper suggested implementing similar design principles within decumulation. This requires nuance, of course, given the “greater irreversibility” of annuities and the variation among retirement participants’ individual circumstances, especially with respect to health and longevity.

Under the Employee Retirement Income Security Act, plan sponsors are responsible for the prudent selection of plan investments—including annuity providers. Qualified default investment alternative safe harbors—such as an in-plan annuity selection safe harbor within the Setting Up Every Community for Retirement Enhancement Act of 2019—have helped accelerate the adoption of target-date funds, but progress on increasing usage of annuities has been slower, the paper suggested.

Guidance from the Department of Labor has clarified that annuities may be included as a default investment as long as the annuities otherwise meet the requirements for inclusion. The DOL’s Employee Benefits Security Administration issued a September 2025 advisory opinion affirming that AllianceBernstein L.P.’s Lifetime Income Strategy, which includes an annuity component, meets the criteria to be classified as a qualified default investment alternative under ERISA. The opinion also reinforced that an investment manager can serve as the fiduciary selecting and monitoring the insurer and product.

“It is worth noting that participants are persistently confused about how TDFs work, to the extent that three-quarters believe that TDFs already provide guaranteed income,” the paper stated, citing MFS Investment Management’s 2025 Global Retirement Survey. “Thus, to some extent, the idea of combining TDFs with lifetime income annuities helps fill a gap between consumer expectations and the reality of financial products.”

On the annuity default front, policymakers could boost demand for annuities by expanding regulatory safe harbors to support a broader range of retirement income options—both guaranteed and nonguaranteed—while pairing defaults with targeted education for participants approaching retirement, the paper suggested. Another policy change could be to amend QDIA rules to encourage or require the inclusion of at least one distribution-oriented default option—which the authors say would not be limited to annuities.

In addition, policymakers could work to advance partial default annuitization—such as defaulting 20% of a participant’s 401(k) balance greater than a threshold level at age 67 into an annuity—and encourage the industry to provide annuities that have trial-and-exit options, including limited underwritten exit windows—during which an annuity purchaser can cancel a contract without incurring surrender charges.

Behavioral Solutions

Retirees’ health, financial and family situations are not identical, and the balance between providing personalized solutions and low-cost guidance remains a significant challenge, the paper stated.

One potential solution could be improvement in financial and longevity literacy among plan participants approaching retirement, the paper suggested. While evidence as to whether general financial literacy increases annuity demand is mixed, annuity-specific knowledge is positively associated with demand.

The TIAA Institute, in a November 2025 report, urged education reforms to improve “longevity literacy,” addressing the fact that only 12% of adults demonstrate a strong understanding of life-expectancy planning.

In turn, plan sponsors could support market development by offering accessible financial information to plan participants who are approaching retirement, the paper stated. Programs such as workplace seminars, interactive online tools and income projections can help participants translate their savings into expected monthly income streams and better recognize the value of longevity protection.

Changing how annuities are framed can increase demand, too, the paper stated. Because annuities are often discussed in conversations with advisers, participants may mistakenly regard them as part of their investment portfolio—and inferior to other investments, given their relatively low rate of return. When annuities were framed as an investment, hypothetical take-up was low (21%). When they were framed as insurance, take-up was much higher (70%), according to research cited by the paper.

The paper offered other behavioral intervention suggestions that could increase usage, such as offering participants an enhanced awareness of their older self; recommitting to a retirement-income strategy at the time the participant is more interested in an annuity; and allowing smaller, regular payments that start during working years.

The authors wrote that considering annuities at the younger age, rather than at the point of retirement, could boost annuity demand. The authors also suggested simplifying the menu of annuity options and providing projected monthly financial figures.

The paper was authored by:

• Hal Hershfield, the marketing area chair and a professor of marketing and behavioral decisionmaking at the Anderson School of Management at the University of California, Los Angeles;
• Suzanne Shu, a professor of marketing at the Charles H. Dyson School of Applied Economics and Management within the SC Johnson College of Business at Cornell University;
• Jeffrey Brown, a finance professor and behavioral economist at the University of Illinois;
• Abigail Hurwitz, an assistant professor of environmental economics and management at the Hebrew School of Jerusalem;
• Moshe Milevsky, a finance professor at the Schulich School of Business at York University in Ontario, Canada;
• Olivia Mitchell, a professor of business economics and public policy at the Wharton School of the University of Pennsylvania; and
• Tamiko Toland, the founder and CEO of the 401(k) Annuity Hub.