The puzzle posed by annuities

Here’s a quick multiple-choice quiz: Are annuities the functional equivalent of a pension? Can annuities be investments that have nothing to do with retirement? Do clients hate annuities? Do clients love annuities? Do many advisors find annuities so confusing that they prefer to ignore them?

If you answered “Yes” to all the above, you’re right.

The insurance and securities industries have been so creative in designing annuity products that the category now defies a simple definition. There’s so much variety, in fact, that the core value of an annuity — lifetime income through annuitization — is sometimes overlooked entirely as advisors become familiar with some annuity products and pay no attention to others. That’s a shame.

Advisors who admit to not knowing much about annuities are less likely to view annuities favorably and less likely to recommend them to a client. That’s one of the highlights of recent research on advisors and annuities conducted by the Alliance for Lifetime Income and analyzed by David Blanchett, the head of retirement research at PGIM DC Solutions and formerly head of retirement research at Morningstar. The finding is disturbing.

As longevity and retirement income adequacy become pressing public policy issues, annuities are uniquely able to help provide a more secure future for many Americans. Advisors, who are central to retirement planning for millions of Americans, are in a position to explain how annuities and annuitization can fit an overall retirement income plan. But advisors themselves must first understand the product, and many don’t seem to be interested. Blanchett noted that despite decades of research on the many different benefits of annuities, widespread financial advisor interest remains relatively mixed.

Interestingly, advisors who feel they know more about annuities tend to have more positive perceptions of them. When those advisors consider annuities in a retirement or financial plan for clients over age 45, more than half of those (54%) with the highest self-assessed level of annuity knowledge consider an annuity always or often, versus only 11% among those with relatively low knowledge.

Advisors’ lack of knowledge also appears to affect client behavior. When advisors were asked about their clients’ perceived interest in annuities, the correlation between an advisor’s knowledge and perceived client interest was found to be very strong. In other words, Blanchett noted, advisors who don’t understand annuities don’t perceive any interest from clients. He observed that this could become a self-fulfilling prophecy, in which the advisor doesn’t believe the client could benefit from an annuity because the advisor doesn’t understand the potential value and therefore never recommends the product.

For years, economists and academicians have pondered the so-called annuity puzzle: Why is it that people love guaranteed, regular income in retirement (i.e., annuitization) but steer clear of annuities? Perhaps one piece of the annuity puzzle is that the lack of product demand among clients is a function of a lack of understanding of annuities among advisors.