Defaulting Participants in Defined Contribution Plans into Annuities: Are the Potential Benefits Worth the Costs?

Abstract

The potential benefits of annuitization vary considerably from one person to the next. However, given the low popularity of annuitization in the United States and the general consensus among researchers that annuitization is the optimal retirement income strategy, introducing annuities as part of defined contribution (DC) plan defaults has the potential to create better outcomes for many workers. Overall, we find evidence to suggest that introducing annuities as part of the plan investment default is likely to result in a net benefit to DC plan participants as long as the decision is well calibrated to the demographics and financial position of the participant population. The potential gains to the plan are further increased if the plan’s default investment can provide personalized recommendations—for example, within some type of managed accounts solution as opposed to a target date fund in which the individual’s preferences are not considered.

TOPICS: Retirement, fixed income and structured finance