No two ways about it, the retirement crisis is coming. And while lifetime income solutions like annuities may not solve the entire problem, they certainly won’t hurt.
An estimated 40.6% of all U.S. households headed by someone aged 35 to 64 are projected to run short of money during retirement, according to the Employee Benefits Research Institute's Retirement Security Projection Model. The shortfall is pegged at $100,000, impacting 100 million Americans, or roughly one in three citizens.
With Social Security failing to cover a retiree’s post-employment needs, especially now that people are living longer, the demand for lifetime income strategies in America’s under-stuffed 401k plans keeps rising.
A recent Allianz Life study found that nearly seven in 10 (68%) people would like more information about annuities as part of their plan, up from 62% in 2022 and 56% in 2021. At the same time, 67% say they would consider adding an annuity to their plan if it were available, up from 60% in 2022 and 59% in 2021.
Robert Pearl, co-founder and wealth advisor at G&P Financial, says certainty and happiness are the largest benefits of adding an annuity option to employer-sponsored retirement plans.
“Personality research shows us that around two-thirds of people have their primary or secondary motivation as certainty. We also know that retirees with a pension have happier retirements than those who do not have a pension, so the ‘personal pension’ or annuity will create income in retirement like a paycheck,” said Pearl.
Tim Pitney, head of lifetime income solutions at TIAA, says the market has seen more than 80% of new entrants in retirement plans opt for target-date funds since the Pension Protection Act was passed in 2006. But in his view, those funds “don't carry the kind of income solutions that are needed by moving to a customized default strategy.”
The traditional pushback against annuities has been fees. But Pitney says the fee problem has been addressed because fixed annuities in sponsored plans are a “spread product” without an embedded cost.
If that is indeed the case, the problem would then be a matter of educating the public about the differences between retail annuities and those that go into institutional retirement plans like defined-contribution plans.
“These are really two different product sets,” Pitney said. “What the industry has and what plan sponsors should demand are high-quality, low-cost, institutionally priced annuities that they can embed into their retirement plans.”
Additional solutions to the retirement crisis are certainly needed. A recent TIAA Institute report revealed that one in five young adults (22%) never expect to retire fully, but instead may work less, or do something different when they can afford to not work full-time. Even more alarming, the study showed 14% of young adults don't expect to ever be able to afford to fully retire.
Pitney believes that adding annuities to company retirement plans won’t just benefit future retirees, but companies in the here and now.
“Having a well-diversified income strategy is critically important, and it's important for the plan sponsors as well, because as they communicate better what those plans are, they're going to have an easier time hiring and retaining good associates,” he said.
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