To Annuitize, or Not to Annuitize: What Sways the Choice?

Combining all the plans across the years 2005 to 2010, workers who made their payout decision between ages 50 and 75 had minimum job tenure of five years, a minimum account balance of $5,000, and had an annuitization rate of 65.8%. 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%.

Not surprisingly, EBRI finds that in all the years studied, plans with no lump-sum distribution options have the highest annuitization rates, very close to 100 percent.  Traditional defined benefit and cash balance plans with no restrictions on LSDs had the lowest annuitization rates. 

In 2010, the annuitization rate for all plans combined was 65.5%, while for plans with no LSD option it was 98.8%, but the annuitization rate for defined benefit plans with no restrictions on LSDs was 44.3%, while for cash balance plans with no restrictions on lump-sum distribution s it was 22.3%.

For older workers across most plan types, annuitization rates increase steadily with account balance, but this is not the case for younger workers.

Annuitization rates also increase with tenure, but for younger workers (2050) with low tenure (less than 10 years), annuitization rates are very low. For older workers (5075), annuitization rates are higher even in cases of low tenure.

Annuitization rates are very low for those below age 40, the study concludes, but from that point onwards, annuitization rates increase for all types of plans. Annuitization rates appear to peak between 65 and 69, but then fall sharply.