A new study from the Center for Retirement Research at Boston College tested whether 401k participants would be willing to use a “bridge” option if offered by their employer, which would allow them to delay claiming Social Security and thereby reap substantially larger benefit payments down the road.
About 27% of the control group surveyed—given minimal information about an option they likely hadn’t heard of before—said they would use the bridge. In another group provided with more information about the strategy, 35% said they would use the bridge.
“The results show that a substantial minority would be interested in the bridge option,” states the brief’s conclusion, but with a couple of caveats.
“Individuals presented with the pros and cons of annuitization versus investment chose to allocate a small but meaningfully larger share of their assets to the bridge strategy. More strikingly, those defaulted into the bridge option ended up allocating much more of their assets to the bridge,” authors Alicia H. Munnell and Gal Wettstein write.
Second, the authors note the results suggest that the default allocation to the bridge tested in the study—up to half the participant’s assets—may be too aggressive, and that the opt-out rate would be lower under a default with a smaller share of assets devoted to the bridge.
The brief titled “Would 401k Participants Use a Social Security ‘Bridge’ Option?” acknowledges that the bridge option is an unfamiliar one, and the study used an experiment to test ways to present the bridge, including through an insurance frame or through a default.
The use of insurance framing and, especially, defaults, increased the share of assets allocated to the bridge.
“If borne out in reality, these benefit increases would contribute to retirement security by giving retirees additional guaranteed income for the rest of their lives”
“These two treatments also led to corresponding increases in projected monthly Social Security benefits. If borne out in reality, these benefit increases would contribute to retirement security by giving retirees additional guaranteed income for the rest of their lives,” the authors write.
The bridge option would use 401k assets to pay retirees an amount equivalent to their Social Security benefits for several years so they can postpone claiming, allowing for the increase in their monthly payment when they eventually do claim.
The bridge would help participants reap the benefits of delayed claiming without having to alter their retirement age. Specifically, the brief notes a participant could increase his or her monthly Social Security benefit by at least 76% by claiming at age 70 (the maximum claiming age) rather than at 62 (the earliest eligibility age).
The brief states that prior research has clearly demonstrated that a bridge option could significantly improve employee welfare, and could be implemented by employers without any legislative or regulatory changes. Yet employers have not introduced a bridge option as a default in their 401k plans. “One reason for employer reluctance may be that they are dubious about employee interest in such a strategy,” the brief states.
Which is why the study was conducted, interviewing a representative sample of older workers (ages 50-65, not retired, and with 401k balances of at least $25,000) to gauge interest. The bridge was briefly explained to them, and then they were asked whether they would participate and how much of their 401k balances they would like to allocate to the strategy. Respondents were further presented with the bridge in different ways to assess potential barriers to adoption and how to overcome them.
To make the process as seamless as possible, the proposal envisions making the bridge strategy the default, with a percentage of a worker’s 401k assets automatically allocated to it. A default, the authors add, is much more likely to be maintained by plan participants than a process requiring active choice.
Munnell and Wettstein said the results are a first step, and further research should “examine the impact of a default in a more realistic setting,” given that the true costs to individuals of changing a default are much larger than those imposed in the study’s experiment.
SEE ALSO:
• Could the 401k Be a Social Security ‘Bridge’ to More Income?
• 4 Biggest Social Security Worries Heading Into 2022
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
I am still looking for a plan sponsor who wants to:
Add a decumulation solution of value, AND
Avoid adding the fiduciary liability exposure that would result from adding an annuity or other insured income solution.
Referrals greatfully appreciated.
Jack
jacktowarnicky@gmail.com