A Shift Toward Annuities
If you won the lottery, would you take the lump sum, or the monthly payments? I’ve heard that most people say they’d take the lump sum, so I was surprised by a USAA survey earlier this year that found, among younger adults (ages 18 through 34) who were presented with that scenario, 65% said they’d opt for the monthly payments.
Maybe there is, in fact, a shift in perception about the need for steady income—if so, it provides a more receptive audience for discussions of income in retirement and of lifetime income products. I make that distinction to separate “income in retirement”—whereby I mean draw-down systems or other nonguaranteed payments coming from, say, a managed account or payout fund—from lifetime income, referencing some sort of annuity, which provides a guaranteed income stream.
In that USAA survey, more than three-quarters (79%) of adult respondents said it will be more important to have guaranteed monthly income in their retirement than a particular dollar amount saved. And this is not the only survey to show that interest in guaranteed lifetime income is growing.
Moreover, there’s been a great amount of discussion in the industry about generating retirement income and lifetime income streams for participants—and lots of hope that the Setting Every Community Up for Retirement Enhancement Act and SECURE 2.0 will open the door to more usage of annuities in plans and for distributions. It’s not that these options haven’t been there before—some version of them has existed since the late 2000s—but I don’t think they’ve had the support of plan sponsors. Therefore, demand has been inadequate to force accessibility and support for them on platforms. I can compare them to automatic enrollment and target-date funds before the Pension Protection Act—plans could utilize them, but many did not.
Is now the time to finally embrace products that intertwine guarantees with traditional investment portfolios? I see insurance providers working to design such products that overcome many of the traditional concerns about flexibility, accessibility and the potential to be personalized to drive positive outcomes for a diverse range of plan participants. There are also programs such as the Hueler Income Solutions model—for which we gave founder Kelli Hueler a PLANADVISER Vision Award earlier this year—that permit buying institutionally priced annuities by individual participants.
An Allianz Life study found that, this year, nearly seven in 10 people (68%) would like more information about annuities as part of their plan—an increase from 62% in 2022 and 56% in 2021. At the same time, 67% said they would consider adding an annuity to their plan investment holdings if one was available, up from 60% in 2022 and 59% in 2021.
Advisers are going to play a key role in furthering discussions about these options. When we surveyed you for our Retirement Plan Adviser Survey last fall, we found that most said the average defined contribution plan participant had minimal interest in investment options that guarantee lifetime income starting at retirement. Based on some more recent surveys, it appears that perception is wrong. We’ll see if the feeling is the same this year, as our survey is in the field now.
Advisers also thought, similarly, that plan sponsors had only a little interest in such products, which may or may not be correct. I might suggest that it’s up to advisers to help plan sponsors know whether or not they have an interest—to help them understand these products and what options might be right for their plan participants, especially if the population of participants wants more information.