More employers offering annuities as part of 401(k) package
The number of employers planning to offer annuities to participants in their 401(k) plans is expected to grow as companies look for ways to provide workers with a steady distribution of benefits during retirement, according to a survey by Watson Wyatt, a global consulting firm. This finding comes on the heels of an announcement by the Department of Labor in early December that it will explore steps it can take to encourage employers to offer lifetime annuities or similar lifetime distribution options in their defined contribution (DC) plans.
In its survey, Watson Wyatt found that nearly one in four employers (22 percent) that sponsor DC plans currently offer an annuity as a distribution option, and 10 percent of those who do not offer one are considering adding it. There are various kinds of annuity options in 401(k) plans that generate a guaranteed lifetime income. Some of these are investment options available to younger employees while they are still employed and contributing to their 401(k) plans, while others are available at the time of retirement. The Watson Wyatt survey was conducted in March and April 2009, and included responses from 149 employers.
“Annuities in 401(k) plans were rarely discussed a few years ago,” said Robyn Credico, a senior retirement consultant at Watson Wyatt. “But in the recent economic downturn, employees without traditional pension plans could not retire because their 401(k) balances were decimated. With this weakness in 401(k) plans now exposed, more employers are exploring ways to minimize their employees’ exposure to risk — including the use of annuities.”
The survey found that the main reasons plan sponsors did not offer an annuity were a lack of participant demand (56 percent) and administrative complexity (36 percent). Also, separate Watson Wyatt research conducted previously found that employees’ interest in life payout annuities is strongly influenced by how the pros and cons of longevity insurance are weighed.*
“Managing lump sums is a huge challenge — even for experienced investors. Given last year’s steep decline in retirement savings, employers can expect employee attitudes towards annuities to shift, as perceptions of risk are heightened,” said Mark Warshawsky, director of retirement research at Watson Wyatt. “There are also clear benefits for employers, who would find it easier to predict and plan for employee retirement. However, due to a perceived lack of demand as well as shortcomings of many providers’ offerings, the market for annuities is still seen as immature by plan sponsors. It’s a cycle that can be broken by employers through the design of good distribution strategies for retirees and effective communication to make the advantages of such annuities clear to employees.”