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Retirement Plan Annuitization May Be a (Big) Niche Product: TIAA

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Only about 14% of U.S. retirement plan sponsors told TIAA they think typical plan participants will use either an in-plan annuity or an outside annuity to generate retirement income.

But, if about 14% of current U.S. defined contribution plan participants end up using annuities to convert their $7.3 trillion in defined contribution plan assets into income, that could lead to about $1 trillion in plan assets flowing into in-plan annuities, or stand-alone immediate annuities, over the next few decades, according to ThinkAdvisor calculations based on the TIAA survey results and Investment Company Institute plan asset figures.

(Related: 3 Amazing Facts About Retirement Saving in Switzerland)

TIAA included information about plan sponsors’ thoughts on annuitization options in a summary of results from  telephone interviews with representatives from 1,001 plan sponsors.

Half of the sponsors were for-profit organizations, and half were nonprofit organizations, such as schools that offer 403(b) plans.

About 41% of the employers said they expect typical  participants to generate income by taking systematic withdrawals, and about 16% expect typical participants to take lump-sum withdrawals.

About 8% expect typical employees to use their assets to buy immediate annuities, or income annuities, from outside the plan.

Although many large insurers have been promoting the idea of building lifetime income annuitization options into more retirement plans, only 6% of the plan sponsor reps said they expect the use of in-plan annuity options to be the typical way participants generate income.

If the plan participants who annuitize are roughly comparable to other plan participants, the percentage of plan assets flowing into annuities could be similar to the percentage of participants who annuitize.

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If participants shifted 8% of the $7.3 trillion in current plan assets into immediate annuities, that would move about $580 billion into immediate annuities over several decades.

If participants shifted 6% of the assets into in-plan annuities, that could move about $440 billion into in-plan annuities.

Insurers participating in LIMRA’s annuity sales survey reported $8.3 billion in immediate income annuity sales for 2017, and about $204 billion in individual annuity sales of all kinds.

TIAA is one of the companies that supports the idea that expanding defined contribution plan participant use of annuitization options would be wise.

Doug Chittenden, an executive vice president at TIAA, said in a statement that the risk of participants outliving their income is a concern for the sponsors.

“Creating a diversified retirement benefits menu that includes a lifetime income option will not only help ensure employees have enough money to cover basic expenses in retirement, it can also help alleviate the stress of rising health care costs,” Chittenden said.

— Read Annuitization Push May Favor Insurers Over Agentson ThinkAdvisor.

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