The Impact of Defined-Benefit Pension Plan Features on the Annuitization Decision, and Implications for Defined-Contribution Benefit Plan Design
The overall objective of the study is to understand the impact of pension plan design features on plan participants’ annuitization decisions. The author finds that the annuitization decision may be driven more by plan rules than by individual choice, and that the annuitization rate may also be driven by employee age, account balance, and job tenure.
Today, private-sector defined-benefit (DB) pension plans are required to provide a lifetime annuity option (a stream of income throughout retirement). However, many plans also offer a lump-sum payout option (i.e., a retirement benefit in the form of a single payment) in lieu of, or in addition to, an annuity. Motivated by the growing concern surrounding retirees outliving their lifetime savings, this study analyzes how the decision to annuitize varies across different types of pension plans. The study makes use of annuitization decision data between the years 2005 and 2010, examining 84 pension plans that were classified into five different categories: (1) traditional DB pension plans without a lump-sum payout option, (2) traditional DB pension plans with strong restrictions on the lump-sum payout option, (3) traditional DB pension plans or cash balance plans with weak restrictions on the lump-sum payout option, (4) traditional DB pension plans without restrictions on the lump-sum payout option, and finally, (5) cash balance plans without restrictions on the lump-sum payout option.