The majority of employees would welcome retirement income
options within employer-sponsored defined contribution (DC) plans, according to
a study from the Alliance for Lifetime Income’s Retirement Income Institute.
The study found many employees prefer to have a mix of
investments and lifetime income over either traditional pensions or investments
alone. Nearly twice as many study respondents prefer a plan that offers a mix
(49.5%) to a system that uses only investments (26.5%) or only a pension (24%)
to provide income in retirement.
The study found pension-only retirement plans are most
popular among participants with less formal education, participants with lower
retirement savings, Black participants and participants who believe they are
less likely to live beyond the age of 75. Investment-only plans are most
popular among participants younger than 35, men, those with savings of between
$100,000 and $499,999, those who have income between $100,000 and $199,999, and
Participants who most prefer a mix of investments and
pensions are those who are age 55 and older, those with income less than
$50,000, women, Hispanic participants (of any race) and respondents with high
Survey respondents were given the ability to select
allocations among stocks, safe investments such as bonds and an instrument that
provides guaranteed lifetime income, with the total allocation adding up to
100%. Overall, participants placed 35.5% in stocks, 31% in bonds and 33.5% in
guaranteed lifetime income.
To better understand why three-quarters of respondents value
access to guaranteed lifetime income in retirement (including those who favored
a pension or a mix of investments and lifetime income), the researchers asked,
“Once you retire, which of the following is the most important attribute of a
retirement savings plan?” The answer most frequently selected by respondents
(31%) was their ability to understand how much they could safely spend. Slightly
less than a quarter of respondents value an opportunity for growth and
protection against a drop in value during a market decline. About one in eight
believed that low expenses and a large number of choices were the most
important attributes of a retirement savings plan.
Substituting Annuities for Bonds
More than four out of five respondents had a positive
opinion of retirement plans that substitute annuities for bonds: 21% indicated
that they would be highly likely to prefer a retirement plan that substituted
guaranteed income for bonds, and 60.3% said that they would be somewhat likely
to do so. Only 19% were either not very likely or not at all likely to prefer a
retirement plan that substitutes annuities for bonds.
“Since insurance regulation requires investment in bonds to
meet expected future income obligations paid to annuitants, it is appropriate
to view income annuities as a component of the fixed-income allocation within a
retiree’s investment portfolio,” the researchers said in the study report.
Study respondents were also asked about deferred annuities,
which allow an employee to buy dollars of fixed future retirement income at a
lower price than if they wait until retirement age to buy income. Eighty-five
percent indicated that they would be very interested (24%) or somewhat
interested (61%) in doing so.
“While prior studies have found evidence of consumer
interest in lifetime retirement income, no study has surveyed defined
contribution plan participants to carefully gauge demand for a range of
possible annuitization options,” says Michael Finke, Alliance fellow and Frank
M. Engle Distinguished Chair in Economic Security at The American College of
Financial Services. “This research aims to take a deeper look at how
participants would design their ideal portfolio, which can help employers
better understand their needs.”
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