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.