What You Need to Know
- Olivia Mitchell is a Wharton economist who has published many papers on annuities and retirement.
- Defined benefit plan participants are much more likely to be offered annuitized benefits.
- Participants with higher financial literacy scores are more likely to choose annuitized benefits.
Nearly half of the older participants in 401(k) plans and other types of defined contribution plans have no idea how they will get cash out of their accounts.
Even some defined contribution plan participants who have taken distributions cannot say whether they took the distributions in the form of lump-sum payments or in the form of a stream of annuity benefits.
Two researchers, Robert Clark and Olivia Mitchell, have included data on the limits of plan participants’ knowledge in a new working paper, based on 2020 survey data, on the factors influencing the choice of pension distribution options at retirement.
What It Means
Some of your clients and prospects may just be pretending to know what kinds of retirement benefits they have, or don’t have.
Make sure they understand the basics before starting to analyze their needs.
Clark is a management professor at North Carolina State University in Raleigh.
Mitchell is a Wharton School economist who has published many papers about annuities, retirement planning and related topics.
Clark and Mitchell have published their new working paper, behind a paywall, on the website of the National Bureau of Economic Research. A working paper is an academic research paper that has not yet gone through a complete academic peer review process.
The researchers based the paper on a module in the University of Southern California’s Understanding America Study online survey program.
One part of the module was a financial literacy quiz, which included questions about how interest rates, inflation and rate compounding work.
The module attracted 2,510 U.S. people ages 45 through 75, including 867 people who said they had received distributions from their plans; 882 who said they expected to receive money or payments from employer-provided pension plans or retirement accounts in the future; and 88 who did not know whether they would receive pension or defined contribution retirement plan benefits.
Defined benefit plans are much more likely than defined contribution plans to offer participants a lifetime annuitization option as the default cash distribution option.
Partly as a result of that difference, defined benefit plan participants were much more likely than other defined contribution plan participants to have received annuitized benefits, and to expect to receive annuitized benefits in the future.
About 71% of the pension plan participants had already received annuitized distributions, and about 77% said they expected to receive annuitized benefits in the future.
Only 12% of the defined contribution plan participants said they had received annuitized benefits, and just 7.7% said they expected to receive annuitized benefits in the future.
Participants who were older, had higher incomes and performed better on the financial literacy quiz were more likely to choose annuitized benefits.