The number of U.S. employers planning to offer annuities to participants in their 401(k) plans is expected to grow as companies look for ways to provide workers with a steady distribution of benefits during retirement, according to a survey by consultancy Towers Watson (formerly Watson Wyatt).
The findings come on the heels of a December 2009 announcement by the U.S. Department of Labor that it will explore steps it can take to encourage employers to offer lifetime annuities or similar lifetime distribution options in their defined contribution (DC) plans.
In its survey, Towers Watson found that:
• Nearly one in four U.S. employers (22 percent) that sponsor DC plans offer an annuity as a distribution option.
• 10 percent of those who do not offer one are considering adding it.
There are various kinds of annuity options in 401(k) plans that generate a guaranteed lifetime income. These include options available to young employees while they are still employed and contributing to their 401(k) plans as well as approaches to rolling over non-annuitized retirement savings into an annuity at the time of retirement.
The survey was conducted in March and April 2009, and included responses from 149 employers.
“Annuities in 401(k) plans were rarely discussed a few years ago,” says Robyn Credico, a senior retirement consultant at Towers Watson. “But in the recent economic downturn, employees without traditional pension plans could not retire because their 401(k) balances were decimated. With this weakness in 401(k) plans now exposed, more employers are exploring ways to minimize their employees’ exposure to risk—including the use of annuities.”
The survey found that the main reasons plan sponsors did not offer an annuity were a lack of participant demand (56 percent) and administrative complexity (36 percent). Separate research conducted earlier in 2009 found that employees’ interest in life-payout annuities is influenced strongly by how the pros and cons of longevity insurance are weighed.
“Managing lump sums is a huge challenge—even for experienced investors. Given the steep decline in retirement savings [in 2008 through the first quarter of 2009], employers can expect employee attitudes toward annuities to shift, as perceptions of risk are heightened,” says Mark Warshawsky, director of retirement research at Towers Watson.
“There are also clear benefits for employers, who would find it easier to predict and plan for employee retirement,” Warshawsky adds. “However, due to a perceived lack of demand as well as shortcomings of many providers’ offerings, the market for annuities is still seen as immature by plan sponsors. It’s a cycle that can be broken by employers through the design of good distribution strategies for retirees and effective communication to make the advantages of such annuities clear to employees.”
Stephen Miller is an online editor/manager for SHRM.
401(k) Distributions: Easing into Annuities, SHRM Online Benefits Discipline, June 2008
The 401(k) Annuity Rollover Option at Ericsson, SHRM Online Benefits Discipline, June 2008
Adding Annuities Called 'Next Frontier' in 401(k) Plans, SHRM Online Benefits Discipline, August 2007
Cashing Out: Help Employees Make Smarter Distribution Decisions, SHRM Online Benefits Discipline, December 2005
SHRM Online Benefits Discipline