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Why It Pays to Shop Around for Annuities

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What You Need to Know

  • There can be significant variation in the payouts available across providers.
  • The range of quotes has exploded recently, corresponding to the sharp rise in interest rates.
  • Plan sponsors that offer a few providers are likely to have more competitive quotes than those with a single provider.

There is a growing interest in strategies that offer protected lifetime income from a variety of groups, particularly financial advisors and defined contribution plan sponsors. While annuities, especially products such as single premium immediate annuities (SPIAs) and deferred income annuities (DIAs), may seem relatively commoditized given the straightforward terms, there can be significant variation in the payouts available across providers.

In a previous op-ed, we provided some context around how the variation in SPIA rates (life-only, for a 65-year-old man) has changed over time. What we find is that the range of quotes (i.e., comparing the best and the worst) has exploded recently, corresponding to the sharp rise in interest rates.

The average variation in SPIA payout rates has historically been about 10%. This means that selecting the highest SPIA can generate 10% more guaranteed (effectively risk-free) lifetime income than the lowest payout rate.

In some of our prior research, we have also shown that some of the highest payout rates came from the highest-rated insurance companies, reinforcing our claim around the risk-free nature of the benefit.

This variation has increased to over 33% as of July 10, 2022, suggesting a significant benefit to shopping around when selecting a product.

In this op-ed, we want to focus less on the time variation effect (demonstrated previously) and more on the average variation in the payout rates over the period of analysis, which includes a data file of some 54,000 payout rates from March 3, 2013, to July 10, 2022.

In this article, we provide context on both SPIAs and DIAs, with delay periods (i.e., whether the income starts two, five, 10 or 20 years after purchase). Understanding the variation of DIAs is especially important given the significant interest in these products among retirement academics.

Comparing Average Payout Quotes

In the chart below, we provide some context around the average variation in payout rates, either comparing the best quote with the average quote (among all companies providing quotes) or comparing the best quote with the worst quote.

There is a relatively clear effect that as the delay term increases, the variation in quotes increases dramatically. While the average variation in the best SPIA (i.e., a zero-year delay) quote versus the worst SPIA quote was roughly 10%, the variation for DIAs with a 20-year delay period was over 30% (or more than three times as large as SPIAs).

This suggests selecting a single DIA provider could be especially problematic because payouts are likely to be materially higher if a retiree has access to a pool of potential insurers versus a more limited list.

Looking at Maximum Differences

The previous exhibit focuses on the average difference in payouts. In our next figure, we provide context for the maximum difference over the entire period (roughly nine years). This could be viewed as the impact of a retiree selecting a single provider at the worst possible time.

The potential benefits of selecting the best available quote are especially notable when looking at the worst possible outcome versus the full period average, especially for DIAs versus SPIAs.

These findings have important implications for a variety of stakeholders. For example, defined contribution products or solutions that rely on SPIAs or DIAs with a single provider are unlikely to offer the most competitive payouts compared with those providing access to a more complete lineup of companies.

In addition, plan sponsors that offer a few providers are likely to have more competitive quotes than if selecting only a single provider, but could still be significantly less competitive than if a wider menu of providers were available.

Overall, this analysis suggests there can be significant implied costs for not actively shopping around for annuity rates, especially for annuities that offer a delayed payout (i.e., DIAs versus SPIAs).


David Blanchett is Managing Director and Head of Retirement Research for PGIM DC solutions, an Adjunct Professor of Wealth Management at The American College of Financial Services, and a Research Fellow for the Retirement Income Institute.

Branislav Nikolic is vice president of Research for CANNEX where he leads research and development in the fields of retirement income planning and investment analytics.  He is currently pursuing a Ph.D. in applied mathematics at York University in Toronto. 

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