Encouraging employers to make asset annuitization a default 401(k) plan option is a bad idea, according to Alicia Munnell, a longtime retirement policy researcher.
Annuitization can help retirees convert part of their assets into a lifetime stream of income.
But typical U.S. households headed by people ages 65 or older face emergency expenses that eat up 10% of their income in any given year, and only 28% have enough assets to cover those kinds of ordinary emergency expenses, Munnell wrote in a commentary published March 20 by the Center for Retirement Research at Boston College.
Munnell was the center's founding director. She's now a senior advisor at the center.
What it means: If use of annuitization options in 401(k) plans becomes more popular, a higher percentage of retirement savers could come to advisors with a stream of private retirement income locked in.
But, if Munnell is correct, advisors could also see more retired clients who need help with scraping up cash to pay for home repairs or dental work.
In-plan annuities: Today, participants in traditional defined benefit pension plans see all of their plan assets flow into what amounts to a default lifetime annuity option.
Participants in 401(k) plans and other defined contribution plans with in-plan annuities can make an active choice to allocate a portion of the plan assets to an in-plan annuity.
Munnell is discussing a hypothetical future arrangement in which a default in-plan annuity would absorb most or all of the assets even of a participant with a relatively modest asset total.
Unexpected expenses: About 83% of retired U.S. households face unexpected repair bills, health care bills or family-related expenses in any given year, and those expenses amount to about 10% or more of the affected retired household's income for about half of those households in any given year, according to academic research cited by Munnell.
To cover the cost of those kinds of routine, unexpected expenses over a 25-year retirement, the household needs to have $200,000 to $400,000 in its emergency fund, she wrote.
Given that fewer than 28% of retired households have such big pools of financial assets, "annuities should not be a default investment in 401(k) plans," Munnell concluded.
Alicia Munnell. Credit: Center for Retirement Research at Boston College.
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