Another Case for Annuities in 401(K) Plans? Cognitive Impairment
|By Diana Britton|
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
During a panel session at BlackRock’s
“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
“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.
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
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