International insurance industry think tank The Geneva Association is the latest financial industry group to pitch annuities as a solution to the growing concern that retirees will run out of money during their golden years.
While 401k advisors have tended to avoid the product in the past, the ability of annuities to mitigate longevity risk and potentially outperform bonds has piqued industry experts’ interest as of late.
So what does it mean for 401k investors?
A LIMRA study earlier this year found nearly seven in 10 annuity owners are confident they won’t outlive their money, and three-quarters believe they’ll be able to afford the life they desire in retirement.
Meanwhile, just 57 percent of retirees without an annuity think their money will last to age 90, and only 64 percent feel they will be able to afford a desirable lifestyle.
The Geneva Association report Annuitisation: Retirement Income That Lasts a Lifetime explains that societal trends like longer life expectancies, lower birth rates and relatively low interest rates, combined with the disappearance of pension offerings (termed Pillar I programs) and greater reliance on individual retirement savings (Pillar II programs), are creating a perfect storm that could threaten future retirees’ financial security.
The report looked at the Pillar II programs for the U.S., U.K. and Switzerland.
It noted that “the U.S. system has been transferring retirement risk from employers to employees, while the U.K. has provided more freedom for retirees and put more pressure on the government.”
The Swiss system has features that cause the average Swiss employee to save more for retirement than his or her counterpart in the U.S. or U.K., it added.
“Starting to save earlier, at a higher rate, and increasing contributions over time helps to secure a large enough Pillar II pension to fund retirement,” Anna Maria D’Hulster, secretary general of the Switzerland-based association said in a statement. “Purchasing a lifetime annuity with all or part of the retiree’s Pillar II can help to ensure that an individual will not outlive his or her retirement funds.”
The report formally recommends structuring default options for defined contribution plans “based upon three principles: automatic enrollment of employees into an occupational pension plan, automatic escalation of contributions with age and duration of employment, and some level of mandatory annuitisation [sic].”