Will Employers Help Workers Avoid Outliving Their Money?
Maybe. But they, and their employees, need convincing.
One of the biggest financial worries of people in their 50s and 60s is this one: That you'll outlive your money. Now, a small but growing number of employers are stepping up to help their employees avoid that problem in retirement.
A survey of 196 large and midsize U.S. employers with retirement plans found that 21 percent are considering offering annuities in 2017 to their retiring employees. (An annuity converts a pile of cash into a steady stream of income.) That’s up from 19 percent who currently do, according to Willis Towers Watson, the benefits consultant that conducted the Lifetime Income Solutions Survey.
“What we’ve seen is growing interest,” said Bill Dewalt, senior investment consultant at Willis Towers Watson. But, he added, there is still “a lot of reluctance” around offering such insurance-backed products turning 401(k) funds into steady income over a retiree’s lifetime.
After all, 79 percent of these large and midsize firms don’t let their retirees convert their retirement funds into annuities.
Why is that?
Objections by Employers and Employees
It turns out employers cite several reasons, not all of them legitimate. And many employees, you might be surprised to learn, aren’t all that keen on taking their retirement money as an annuity.
Let me start with the employers’ objections.
Nearly all the HR, benefit and finance executives Willis Towers Watson surveyed cited “fiduciary risk” and “cost” as top barriers to offering lifetime income solutions.
The fiduciary risk, Dewalt said, means a fear that the insurer the employer chooses won’t be able to make all the payments. “What happens if the insurer becomes insolvent? Will it come back to us?” Dewalt said the companies wonder.
Cost Concerns: Overblown?
Fair enough. But concerns over cost seem overblown.
“If there’s a readily available option for the [firm's] record keeper, the cost to implement this is small or zero,” said Dewalt. And fees on the investment will drop “as demand grows and there will be more price competition.”
In other words, it’s a chicken-and-egg thing. Employers won’t offer employees annuities for 401(k) withdrawals because they cost too much. But if more employers offered them, those expenses would shrink.
A Perceived Barrier: 'Administrative Complexity'
Nearly nine in 10 of the survey respondents not considering lifetime income solutions or not interested in them cited “administrative complexity” as a barrier. Here, too, Dewalt said that fear is overstated.
“We found that many record keepers offer one or more effective solutions — but take-up by sponsors [the retirement plans] is very low,” he told me.
Other reasons why companies said they won’t offer the annuity option: “market offerings are not satisfactory and/or too new;” “unfamiliarity with market offerings” and, noted 85 percent, “lack of participant demand.”
I’ve heard that last one before. In fact, I wrote about it in my 2013 Next Avenue blog post, “The Irrational Retirement Choices We Make.”
Solving the Annuity Puzzle
In that post, I described a study by John Beshears of the Harvard Business School and four co-authors trying to solve what economists call “the annuity puzzle.” That’s the phrase they use when noting that most employees who are about to retire take their pension as a lump sum rather than an annuity.
Economists think that’s wholly irrational. Why would you want the hassle and risk of having to manage this money for the rest of your life! when you could leave the driving to the insurance company and expect to receive steady, monthly payouts as long as you last?
The authors surveyed 5,000 Americans age 50 to 75 and found the reason so many detested the annuity option was they hated its rigidity. What if you need more money in a given month because you have to buy a car, for example? Or because you want to travel? No dice with an annuity, and that's a bet many employees won't make.
The Contradiction About Outliving Your Money
When I raised this concern with Dewalt, he acknowledged the lack of flexibility explains why there hasn’t been a groundswell of demand by near-retirees to take 401(k) funds as annuities.
“It’s one of those contradictory things,” he said. “You ask employees what their biggest worry is and they say ‘running out of money.’ Then you offer a solution and they say ‘I don’t want to give all my money to an insurance company irrevocably.'”
That could change, however. Today, Dewalt conceded, “employee take-up is low where the annuities are offered. But we’re still in the beginning of the drawdown phase of 401(k)s. Most participants are just accumulating and haven’t started to access their funds.”
Needed: 401(k) Annuities With Flexibility
Dewalt thinks 401(k) plans eventually will need to offer flexible annuities, “so individuals can tailor their lifetime income drawdown to their own circumstances.” Maybe, he added, some retirees will need to annuitize just a portion of their assets “to cover essential needs.”
Another reason for the low take-up by employees may be that employers don’t know much about annuities. “Is there an opportunity to engage and energize plan members to use lifetime income solutions within a plan? We feel regular outreach might help,” the Willis Towers Watson report said.
How Employers Prefer to Help
These days, employers are instead far more likely to help employees avoid outliving their money (what economists call “longevity risk”) through lifetime-income education and lifetime-income planning tools. Nearly two-thirds of the firms Willis Towers Watson surveyed offer those.
“We found employers are very comfortable providing education and tools, but there’s more reluctance to adopt solutions that are more effective to make money last for the entire retirement,” said Dewalt. “Over time, there will be growing demand by participants for these solutions and employers are going to need to help employees.”
Personally, I think the time is now.