Plan participants familiar with annuities overwhelmingly favor them as part of an adequate retirement savings strategy.
The problem for proponents of guaranteed income options is that relatively few participantsunderstand what annuities are.
New research from Prudential Retirement shows that nearly 80 percent of participants that are familiar with annuities consider them an important feature of 401(k) plans. And 77 percent of those participants said they would use an annuity if it were offered in the workplace retirement plan.
But the value proposition of guaranteed income options remains a mystery to most plan participants; only about one-third of participants surveyed by Prudential claimed familiarity with the products, and only 5 percent could confirm they own annuities in their retirement plan.
That the majority of plan participants lack clarity on how annuities work goes a long way to explaining why only 32 percent of all participants surveyed by Prudential say they are an important feature in plan design.
In a newly published white paper, “Ease of Automation and Guaranteed Lifetime Income,” Prudential speculates that participants’ relatively low level of understanding of annuities is contributing to sponsors’ reluctance to offer them.
Some sponsors “contend that because plan participants aren’t particularly familiar with, or clamoring for, in-plan lifetime income solutions, there’s not much incentive to embrace those benefits — particularly if the income solution is positioned as a default,” write John Kalamarides, senior vice president of Institutional Investment Solutions, and Srinivas Reddy, senior vice president of Full Service Investments at Prudential Retirement.
Familiarity leads to satisfaction
About 35,000 defined contribution plans — only 4 percent of all plans — offer a guaranteed lifetime income solution, according to LIMRA data cited by Prudential.
Prudential’s paper suggests low in-plan adoption of annuities is directly correlated with the fact that so few sponsors offer the option. One-third of participants that don’t have an annuity option said they would be “very likely” to consider one if offered.
And for participants without access but who claim familiarity with annuities, 77 percent said they would likely use them as part of their savings strategy, compared to only 23 percent of participants that are not familiar with guaranteed income products.
Prudential’s survey of participants shows that those with experience owning annuities tend to be more affluent, contribute at higher levels to their 401(k) plans, and are generally better prepared for retirement, according to the white paper.
The most recent research builds on previous surveys of participants’ overall sentiment toward their defined contribution plans, which shows low levels of satisfaction with plans’ ability to protect from market volatility, and a general dissatisfaction with maximizing potential growth.
Prudential says that annuities can help bridge the gap between those tensions — the need to protect from volatility while maximizing returns.
“Providing participants with guaranteed lifetime income solutions that protect that income against market downturns, while locking in contributions and potential returns, can give them confidence to invest in an appropriately diversified portfolio — one that includes some of the riskier assets they’ll likely need to meet their retirement goals,” write the paper’s authors.
In a statement, Sri Reddy said, “Plan sponsors clearly want their employees to be able to secure lifetime financial stability. But our findings show there is an obvious confidence gap between solutions many plan sponsors actually offer and available options that could increase employees’ belief that they can truly save enough to fund their hopes and dreams for the future.”
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