The battle to get annuities into 401(k) plans has been hard-fought, and it’s not over yet. Insurance companies see a need to get ‘lifetime income products’ into retirement plans, and have had some success making the case that most plan participants aren’t prepared to create an income plan on their own. Of course, annuities are expensive and complex products. But economist David Laibson pointed to an as-yet-unheard argument for including them in D.C. plans: the decline in cognitive ability as we get older.
During a panel session at BlackRock’s New York headquarters Thursday, Laibson, professor of economics at Harvard and a research associate at the National Bureau of Economic Research, said the prevalence of dementia doubles every five years for North American adults over the age of 60. Nearly 30 percent of adults in their 80s have cognitive impairment without dementia, and 38.8 percent of those over 90 years old have cognitive impairment.
“These individuals should not be making complicated financial decisions—allocating assets, deciding how much to withdraw, dealing with financial advisors calling up trying to sell products with a cold call,” Laibson said. “They need a check that comes every month and automatically deposits into their checking account, and that’s not what they’re getting in the new D.C. world.”
Annuities would reduce the investor’s need to manage a portfolio, something that’s difficult to do in old age, Laibson argues. Yet the system we have in place now for transitioning assets into retirement is the rollover IRA. This vehicle is minimally regulated and much riskier than 401(k) and 403(b) plans that have ERISA protections, he argues.
“The rollover IRA is really the wild west of financial products,” Laibson said.
BlackRock’s annual retirement survey, conducted by the Boston Research Group, found that retirees and pre-retirees are conflicted about annuities. As Laibson pointed out, 77 percent of retirees said they would have chosen to receive a steady stream of income throughout retirement, if given a choice. But when asked if they would prefer having the flexibility to control their assets, or giving control to an investment fund while having the security of guaranteed income during retirement, only 26 percent said they would prefer the latter.
“People are of many minds about annuitization,” Laibson said.
If you frame annuities as guaranteed income for life, investors are all for it, but the minute you frame it as a loss of control, they run for the hills, he said. Laibson believes investors will feel more secure about annuities if they’re framed as a small piece of a very large portfolio. This is less threatening than putting all of their assets into one account with limited liquidity.
Warren Cormier, founder and president of Boston Research Group, believes poor marketing is the primary hurdle to getting individuals into annuities. “I wouldn’t misinterpret it as being a lack of interest, just a lack of how we’re approaching it as an industry.”
At the same time, the annuity industry is going through growing pains, with fewer players, less attractive guarantees and a glut of complex features.
“I think we need a system ultimately where annuities are as easy as auto enrollment, and we’re miles away from that,” Laibson added.
We need regulation that will make that easier to achieve, and plan sponsors that have a greater comfort in using annuity products, he said.
But BlackRock’s survey showed that plan sponsors are on their way to having more annuity options in their retirement plans, although there’s some hesitancy. According to the survey, 11 percent of plan sponsors currently have a guaranteed income option, while 19 percent plan to implement that in the next year.
The biggest hurdle to implementing guaranteed income into the plan is not having the time to conduct due diligence, with 48 percent of plan sponsors responding that way, said Chip Castille, head of BlackRock’s U.S. and Canada defined contribution group. “Insurance-type products in the D.C. market is relatively new.”