The most consequential retirement policy reforms in more than a decade was recently signed into law, including a key reform designed to make more annuities as an option in 401(k) plans. But will access to annuities be beneficial to consumers? Economists tend to favor annuities because they are one of the only ways to handle the greatest uncertainty in retirement: how long each retiree will live. But consumers have been far less enthusiastic. Indeed, economists have coined the term the “annuity puzzle” to describe the gap between expected and actual demand for the products.
The SECURE Act is designed to make it easier for employers to offer annuities as an option in 401(k)-type plans. Under current law, many employers worry that offering an annuity puts them on the hook for assessing the financial health of the life insurance companies providing the annuity—and that they could be sued if the insurer goes under down the line. The new law provides a safeguard for employers who undertake a diligent search and offer an annuity from an approved company with a solid track record. One recent survey found that only 6% of plans offered annuities as an option.
Economists’ support for annuities is often tied to the observation that uncertain lifespans makes retirement planning a seemingly impossible task. Spending too much means running the risk of exhausting your savings; spending too little many mean foregoing the rewards of a lifetime of work. Annuities, and the regular payment they provide, can help smooth that gap. But Americans consumers haven’t agreed—over the past decade, balances in retirement saving accounts have more than doubled from $8.7 trillion to $18.3 trillion, but very little of that stockpile has been used to purchase annuity contracts.
Academic evidence supports the notion that annuities are more popular when framed as an insurance product, rather than an investment vehicle. For example, one study found that the share of consumers preferring an annuity more than tripled when the product was framed as a way to boost lifetime consumption, rather than as a way to raise investment income.
With the changes made in the SECURE Act, the hope is that we’ll see more employers offering their workers income annuities with reasonable fees. For some, this may mean having the option to buy an annuity with part of the savings accumulated in a 401(k); for others, it could mean devoting part of each paycheck to buying incrementally more annuity income throughout their career. In either case, more widespread access to annuity plans in a workplace account may mean more workers have a guaranteed payment for life and, by extension, more security in retirement.
You can find the full article, including links to the studies mentioned, at MarketWatch.