Eight in 10 participants prefer guaranteed income options in defined contribution plans
WASHINGTON, D.C., November 3, 2021 — New research conducted by two leading fellows from the Alliance for Lifetime Income’s Retirement Income Institute, Participant Attitudes Toward Guaranteed Income in a Defined Contribution Plan, finds that employees would welcome retirement income options within employer-sponsored defined contribution plans. A majority of workers would prefer a mix of investments and lifetime income over either traditional pensions or investments alone.
This research comes as more plan sponsors consider adding in-plan protected income options in the advent of The Setting Every Community for Retirement Act (SECURE Act). The SECURE Act removes some of the barriers for plan sponsors to incorporate lifetime income products into their defined contribution plans and allows employers to offer protection and greater future retirement security to their employees in ways they never have before.
Most employees today invest in a target-date fund developed primarily for growing savings over time. Since most employers no longer offer traditional pension plans, adding lifetime income options can provide employees with greater clarity about how much they can spend over time as well as freedom from the worry of running out of savings.
“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,” Michael Finke, Alliance fellow and Frank M. Engle Distinguished Chair in Economic Security at The American College of Financial Services, said. “This research aims to take a deeper look at how participants would design their ideal portfolio, which can help employers better understand their needs.”
Finke co-authored the paper along with Jason Fichtner, senior fellow for the Alliance for Lifetime Income’s Retirement Income Institute and vice president and chief economist at the Bipartisan Policy Center.
Employees Want Portfolio Options – Including Protected Income
The research also found that 81% of respondents indicate they are either somewhat likely or highly likely to prefer a retirement plan that substitutes guaranteed income for other investments.
Building on interest in protected income options, nearly twice as many participants prefer a mix of annuitized income, such as a pension and investments, to a retirement benefit that offers only one or the other. In fact, only 1 in 4 respondents (26%) indicated they would prefer investments only.
The Ideal Portfolio
On average, workers would place approximately 33% of their retirement savings in an income annuity, 35% in stocks and 31% in bonds, respectively. Additionally, most savers (70%) would place at least 10% of their savings in a product that provides income that begins at age 80.
The research found that the ability to partially annuitize is most attractive to women, those with more formal education and older respondents. When given the option to allocate among stocks, bonds, and guaranteed income, respondents with greater levels of education and in the middle-income categories ($50,000 to $100,000) are most likely to allocate at least 50% of their savings to guaranteed income.
Employees Want Peace of Mind and Help in Spending Safely in Retirement
The most important attribute of retirement savings plans that participants value is whether a plan’s design helps them understand how much they can safely spend in retirement.
In addition, the peace of mind offered by a product that provides a guarantee of lifetime income, the reduced fear of outliving savings and the ability to budget spending in retirement were the most frequently cited reasons for preferring an annuity in the study.
When asked why they chose to buy lifetime income, one respondent stated, “It seems like the most stable guaranteed plan and I like stability.”
“Annuities have been proven to give retirement security to millions of Americans for hundreds of years. They can absolutely fulfill the role that traditional defined benefit pension plans played by providing a monthly income for life,” said Fichtner. “It is critical that employers take a look at their offerings and understand their workforce’s desire for protection and greater retirement security.”
To learn more about the Retirement Income Institute, please visit www.ProtectedIncome.org/Retirement-Income-Institute.
About the Alliance for Lifetime Income
The Alliance for Lifetime Income is a non-profit 501(c)(6) educational organization based in Washington, D.C., that creates awareness and educates Americans about the value and importance of having protected lifetime income in retirement. Our vision is for a country where no American has to face the prospect of running out of money in retirement. The Alliance provides consumers and financial advisors with educational resources, interactive tools, and actionable research and insights to use in building retirement income strategies and plans. We believe focusing attention and conversations on retirement income that lasts throughout life leads to greater retirement security for millions of Americans. Learn more at www.ProtectedIncome.org.