Still working on the annuity puzzle

Another factor that may increase annuitization in the near future is changes in federal regulations. First, in-plan qualified longevity annuity contracts—QLACs—will become more widely available. Second, the decision to allow annuities within target-date funds could make it easier for participants to consider the annuity option.

In the meantime, however, some plans have much higher annuitization rates and those cases provide insights into retirees’ decision-making processes. At TIAA-CREF, which provides retirement plans to employees of educational and non-profit institutions, the annuitization rate been holding at about 40 percent, according to Ed Moslander, senior managing director and head of institutional client services at the firm in New York City. That figure has increased from about 30 percent in 2009, he says. He cites several possible reasons behind the recent rise and the overall high rate. Recently, the economic uncertainty that dominated in 2008-2009 possibly led retirees to seek greater income security, he speculates. From a historical perspective, most employees in higher education and non-profits did not participate in defined benefit plans. Consequently, they viewed their 403(b) accounts as a primary source of retirement income, unlike 401(k) plans, which many consider a wealth accumulation vehicle. That viewpoint meant that annuitizing at least part of their 403(b) plan balance was a natural progression for many retirees.

TIAA-CREF’s research into the annuitization decision provides additional insights. A 2010 study highlights several that advisors should consider:

• Investing in retirement plan annuities during the working years influences the annuitization decision: “Retirees who have annuitized their retirement savings are more than twice as likely, compared with retirees who have not annuitized, to have saved through an annuity in a DC plan while working.”
• For clients working with an advisor, the advisor’s perspective on annuitization matters: “Over one-half of retirees who have not annuitized have worked with a financial advisor and most of these tend to follow the advice received. But only 5 percent were advised to annuitize. By contrast, 71 percent of annuitized retirees report working with a financial advisor in deciding to purchase an annuity or implementing the buy decision.”
• Annuitants are satisfied with their decision: “57 percent of annuitants are very satisfied with the decision to purchase a payout annuity and an additional 32 percent are somewhat satisfied.”