As boomers start to retire, they’re confused about whether or not they want annuities—and the confusion stems not from old age but from a fear of losing control, according to results of studies from BlackRock and Harvard University released last week at a press briefing in New York.
Retirement income is a growing concern nationwide, but because retirees themselves don’t really know whether they do or don’t want a guaranteed income stream, employee 401(k) plan sponsors may become more responsible for helping people make that choice, the studies conclude.
“I don’t think the U.S. public knows what it wants,” said David Laibson, a Harvard College professor and aging expert with the National Bureau of Economic Research, whose research focuses on behavioral economics and human irrationality. “You don’t get a radically different answer when you change the wording of a question about whether you want chocolate or vanilla ice cream, but with annuities you do.”
Retirees were asked whether, knowing what they know now, they would have chosen to receive a steady stream of income, a lump sum, or a mix of both when they retired. The majority, 77 percent, said they would have chosen a steady stream, while 15 percent would have picked a mix and 8 percent would have taken the lump sum. However, when asked if they wanted the flexibility to control their retirement money any way they wanted, 79 percent said they preferred that control over guaranteeing themselves a secure retirement income.
Cognitive Impairment: A Good Argument in Favor of Annuities
The problem is compounded because cognitive function declines for adults, Laibson said. The prevalence of dementia in North America doubles every five years in people ages 60 and older, he noted, adding that cognitive impairment without dementia is an even greater risk.
“These individuals should not be making complicated financial decisions. They need a check that comes regularly that they can deposit into their checking account,” Laibson said, adding that the rollover IRA “is the Wild West of financial products.”
Laibson delivered his remarks as part of BlackRock’s annual retirement briefing, where this year the world’s largest money manager shared the results of a survey of 1,002 employed workers as well as 1,035 “newly minted” retirees, whose average age is 67. Overall, the survey found that retirees who are actually living the experience and receiving income feel more secure than worried workers who fear they will never save enough money to retire.
The majority of retirees, 64 percent, strongly agree that their financial situation allows “having a choice not to work anymore,” while just 37 percent of workers strongly expect that their finances will allow such a choice, according to BlackRock’s 2012 survey of retirees and workers.
In addition, retirees report themselves as doing better than current workers expect to do in terms of “buying the things I want after paying for essentials,” at 46 percent versus 37 percent, and “easily covering my medical costs,” at 43 percent versus 28 percent.
At the briefing, Chip Castille, head of BlackRock’s U.S. and Canada defined contribution group, also spoke to the issue of guaranteed retirement income, noting that seven out of 10 retirees in this year’s survey said that more than 60 percent of their expenses are covered by traditional secure income, including defined-benefit (DB) pension plans, Social Security and annuities.
But in the future, Castille added, the anticipated shift from DB to defined-contribution plans such as 401(k)s will become more complicated as retirees try to figure out how to turn their 401(k) savings into a retirement income stream.
“That’s going to be the great awakening,” Castille said. “As people get older, they lose a lot of cognitive ability, and they don’t understand how that will affect their retirement.”
The vast majority of both retirees and current plan participants, at 94 percent and 89 percent respectively, believe that employers should include a secure income option in their retirement plans, according to the BlackRock study of plan sponsors.
While BlackRock’s defined contribution team discusses the retirement income issue whenever they meet with plan sponsors, according to Castille, an equally vast majority of plan sponsors are not addressing the issue—though there are signs of a change in attitude.
Plan Sponsors Slow to Embrace Change
Today, 11 percent of plan sponsors have a secured income option, while 19 percent plan to implement such an option in the next 12 months. The change in attitude stems partly from plan sponsors’ low confidence level in workers’ ability to save enough to get the monthly income they need in retirement. More than half of sponsors believe that their employees aren’t saving enough.
To be sure, any level of engagement in a retirement plan is better than none, said Warren Cormier, president of the Boston Research Group, which conducted both the participant and plan sponsor studies for BlackRock.
“There’s a great deal of regret among people who look back,” Cormier said, noting that 90 percent of retirees regretted not enrolling in their savings plan early in life and 78 percent regretted not saving the maximum permitted by their 401(k).