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Employers are hearing time and time again that their workers prefer a steady stream of income in retirement to a one-time lump-sum payout.
The problem: not many workers know how to achieve that, leaving employers in a bind in terms of helping their workers prepare for retirement.
“When you speak of guaranteed lifetime income as a concept,” an overwhelming majority “would favor a lifetime income solution,” Frank O’Connor, vice president of research and outreach at the Insured Retirement Institute, told Bloomberg Law. But when asked about how they’d achieve that, many don’t know where lifetime income comes from, he said. The IRI is a financial services trade association for the retirement income industry.
Why the disconnect? O’Connor says Americans either don’t understand that lifetime income comes from an annuity, or they have negative ideas about annuities.
An annuity is a financial product often purchased by an individual designed to pay out a monthly stream of income beginning at a fixed point in time. There are pluses and minuses to using an annuity. They can help guarantee a lifetime stream of income, thus helping avoid the threat that someone will outlive their savings. But some people aren’t comfortable purchasing annuities because they’re worried they may not live long enough to get the full benefits of them.
The Treasury and Labor departments have been working on promoting lifetime streams of income in retirement for the past several years as a way to prevent people from outliving their retirement savings. Treasury issued final rules last year allowing defined benefit plan participants the option of taking both an annuity and a lump-sum payment from their pension plan when they retire. The DOL worked on a project that would have had pension benefit statements showing participants what their account balances would amount to in retirement, but it never got off the ground.
It’s not clear how big a priority lifetime income will be in the Trump administration if the nominee for the head of the DOL’s Employee Benefits Security Administration, Preston Rutledge, is confirmed. Rutledge has been a proponent of annuities and lifetime income in the past. He took the lead on several retirement-related bills while working in the Senate Finance Committee with Sen. Orrin Hatch (R-Utah), including the Secure Annuities for Employee (SAFE) Retirement Act of 2013. The bill looked to further the use of annuities in state and local government plans, as well as modifying minimum distribution rules to allow for the purchase of an annuity.
When it comes to retirement income, 62 percent of Americans say they would pick $2,700 a month for the rest of their lives and 30 percent say they would prefer $500,000 all at once, according to TIAA’s 2017 Lifetime Income Survey, released Oct. 17. On the flip side, only 16 percent say they’re very familiar with annuities and 51 percent say they’re not familiar with them.
Employers offering retirement plans should be aware of this disparity and try to use it to inform how they talk about saving for retirement and spending money in retirement, Diane Garnick, chief income strategist with TIAA, told Bloomberg Law.
There’s often a lot of education about retirement savings on the front end when new employees start at a company. When workers are gearing up for retirement, there’s a lot less guidance, Garnick said.
This means employers need to think differently about how they communicate with their employees who are close to retirement. One way to do this would be to give guidance that educates employees on how to budget for day-to-day living, health care, and “fun” expenses, Garnick said. The many baby boomer employees nearing retirement will be asking for help in this area, she said.
Not many employers currently offer an annuity embedded in their retirement plans. Only two in 10 Vanguard plans offer annuities, according to its How America Saves 2017 Survey.
“On the employer side, few plans offer annuities, in part, due to the DOL rule requiring employers to make a solvency determination before engaging an insurer,” Jack Dolan, vice president of media relations with the American Council of Life Insurer, told Bloomberg Law in an email. The ACLI advocates for public policy that supports life insurers’ products for financial and retirement security.
One way to make it easier for employers to offer annuities in plans would be to pass legislation in this space. Those surveyed by TIAA said they’d support legislation to make it easier for employer retirement plans to include lifetime income products. They also said they’d support legislation that requires retirement account statements to include an estimate of monthly income in retirement.
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