There’s an interesting and well-known dichotomy between researchers’ view of income annuities’ value and retirement plan participants’ behavior.
Researchers correctly argue that guaranteed income annuities are excellent tools for covering retirees’ basic expenses and securing a lifetime income for one or two lives. Participants in defined contribution (DC) and defined benefit (DB) plans might agree with those points, but they vote otherwise with their funds.
It’s estimated that between 50 percent and 75 percent of DB plan benefits are taken in the form of lump sum. Even though an annuity is the plan’s default option and lump sum withdrawals involve the completion of more forms and waivers, most DB-plan participants nonetheless take the money and run.
Even fewer DC-plan participants choose to annuitize their balances: only an estimated 10 percent of retirees age 65 or older go the annuity route.
One possible reason for the low annuitization rates is that retirees tend to think in either-or terms and overlook the partial annuitization plus lump sum combination. In some plans, however, this combination is widely used.