Financial advisors who have experience working with retirement savers have likely come across the so-called “annuity paradox.”
When presented with the basic concept behind annuities — income insurance solutions that provide a guaranteed amount of lifetime income in exchange for an upfront premium — many retirement savers like the idea. So do academics and financial advisors seeking to address their clients' longevity risk.
The word “annuity” itself, however, continues to conjure up negative emotions and misconceptions among the general public and popular (if oft-critiqued) financial gurus — a situation many tie to an earlier epoch in the financial service industry when retail annuities came with high commissions, an onerous purchase process and other problems.
The decidedly mixed status of annuities is examined in depth in a new report issued by the Milken Institute through its Lifetime Financial Security Program, which gathers information about innovative financial products that encourage or facilitate long-term savings and income protection.
As the report details, asset managers and recordkeepers are seeking seamless ways to help people access guaranteed income where they already save, often by embedding annuities or annuity-like solutions within workplace retirement savings plans.
Generally, this takes the form of inserting annuities within target-date funds or other default investment options utilized by millions of Americans enrolled in 401(k) plans.
Among the asset management and recordkeeping firms having done so, either alone or in partnership with other service providers, are Nationwide Financial, American Century Investments, Lincoln Financial Group, TIAA, Empower, BlackRock, T. Rowe Price, Fidelity and many others.
The solutions differ slightly in structure, Milken reports, but their essential features create access to guaranteed lifetime income within employer-sponsored retirement plans, including 403(b) and 457(b) plans.
The report’s authors argue this is a promising development for Americans’ long-term retirement security, one that could help to destigmatize annuities (or at least guaranteed income solutions) in the eyes of the public.
Nonetheless, the authors find, there are also some big hurdles left to clear when it comes to broader utilization of annuities by the investing public.
See the slideshow for a review of six key findings from the new Milken report that help to demonstrate how both annuity solutions themselves and Americans’ use and perceptions of the products are evolving.
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