Annuities could be the next big thing in retirement plans, finds TIAA research

Annuities could be the next big thing in retirement plans, finds TIAA research
Inaugural survey report finds three-quarters of DC plan leaders expect demand for lifetime income to grow over five years – but 'annuity fluency' could pose challenges.
DEC 11, 2024

A new survey from TIAA points to a rising tide in demand for lifetime income products within DC plans, though a lack of understanding among employers could slow the wave.

The survey, conducted by Greenwald Research, draws on insights gleaned from 500 C-suite decision-makers managing 401(k), 403(b), and 457 plans.

According to the inaugural survey report of DC plan sponsors, titled "Building a Better Retirement 2024," 76 percent anticipate growing interest in annuities over the next five years, echoing the rise of target-date portfolios in retirement plans after policymakers set the stage for them to become the default option. Among sponsors who do not currently offer an annuity, more than 40 percent say they plan to introduce one within two years.

But even though the interest for lifetime income solutions is real, the report points to a lack of "annuity fluency" as a potential challenge, with only 37 percent of respondents feeling confident in explaining the value and importance of these products. 

“As pension plans began to wane, employers and policymakers were focused on getting people to save through defined contribution plans,” Kourtney Gibson, CEO of TIAA Retirement Solutions, said in a statement revealing the results. “Now with growing uncertainty around Social Security and people living longer lives, we need to help people manage their savings to last through retirement."

The survey also revealed that 85 percent of sponsors believe employees require guaranteed lifetime income beyond Social Security. Among external factors driving the consideration of annuities are Social Security's uncertain future (59 percent), increasing adoption by other employers (52 percent), and demographic shifts, such as longer lifespans (48 percent). Debt in retirement also plays a role, as the report cited statistics from a Harvard study that found over 40 percent of seniors who were at least 65 years old still had a mortgage.

Still, challenges persist. Sponsors not planning to offer annuities cite complexity and a lack of understanding as primary barriers. Even among those interested, 39 percent say decision-makers lack sufficient knowledge to move forward. Among sponsors without plans to offer annuities, 43 percent agreed there's a lack of understanding, making it the top obstacle to adoption.

"Our research indicates that plan sponsors are open to offering lifetime income but need support to add it to their plans – and consultants have a huge role to play in delivering that help,” Gibson said.

Forty-eight percent of employers in the survey believe guaranteed income is a major means to have a positive impact on participants' retirements, while another 38 percent said they're likely to be early in embracing in-plan annuities.

The study also highlights the potential for financial consultants to play a pivotal role in bridging knowledge gaps. Currently, nine-tenths (88 percent) of sponsors rely on external consultants for fiduciary oversight and strategic advice, and many are calling for expanded guidance to help implement lifetime income solutions effectively.

"[A]s the lifetime income trend gains momentum, [plan sponsors] will be looking for consultants to provide support especially on significant ideas and strategy," said Jason Key, TIAA Retirement Solution's head of consultant relations. 

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