Differences in pension plan rules determine annuitization rates

Differences in defined benefit plan rules or features result in different annuitization rates in defined benefit plans, new research shows.

The Employee Benefits Research Institute, Washington, D.C. arrives at this conclusion in the January 2013 edition of EBRI Issue Briefs, a monthly publication that evaluates employee benefits issues and trends. The periodical also analyzes employee benefit policies and proposals.

The brief shows that the annuitization rate varies directly with the degree to which plan rules restrict the ability to choose a partial or lump-sum distribution. The study also shows that annuitization rates vary significantly across different plan types.

Combining all plans covering the years 2005-2010, the report shows that workers who made their payout decision between ages 50 and 75 had a minimum job tenure of five years and a minimum account balance of $5,000 had an annuitization rate of 65.8 percent. But within this group of workers, those who had no plan restrictions on a lump sum distribution had an annuitization rate of only 27.3 percent.

In all the years studied by EBRI, plans with no lump-sum distribution (LSD) options have the highest annuitization rates (close to 100 percent). Traditional defined benefit and cash balance plans with no restriction on LSDs had the lowest annuitization rates.