How In-Plan Annuities Enable Participants to Turn Savings into Income
When employers decide how to help retirement plan participants turn savings into income, no one solution is a clear winner, but annuities are the only means to provide guaranteed income within a defined contribution (DC) plan. However, annuities are not commonly available as distribution options and expanding participant access to lifetime income is an important avenue to increasing retirement security. We examine the differences in existing and potential future product designs for providing lifetime income in retirement plan defaults in our recent paper for the International Review of Financial Consumers, “Using Defaults to Enhance Adoption of Lifetime Income in Defined Contribution Plans.”
While the DC system has come a long way in improving investment outcomes during accumulation, it still falls short in helping participants secure lifetime income in retirement. Among economists, annuities are considered the optimal design for turning savings into retirement income because they allow individuals to pool the risk of an unknown lifespan. Compared to unprotected accumulation, longevity risk pooling through annuities results in higher optimal spending without the risk of outliving savings. Adding annuities to qualified default investment alternatives (QDIAs) is the most promising way to help workers gain access to high quality products that provide lifetime income security.