Perspectives: Is it Time to Make Annuity Income Automatic?

For about 25 years, employees have been told that saving for retirement is important, but they haven't heard much about how to turn those savings into dependable retirement income.

There was discussion, however, at the American Council of Life Insurers' annual conference about the benefits of making annuity income automatic using the assets in defined-contribution workplace retirement plans, which are mostly 401(k)s. Included in the ongoing discussion are academics, policymakers and members of the insurance industry.

Proponents don't intend to make retirement-plan annuitization mandatory, but they do want to make it a default option for some percentage of each individual's plan assets, perhaps 50%, with the individual having the ability to opt out. Jeffrey R. Brown Ph.D. and professor of finance at the University of Illinois at Urbana-Champaign, says a default option can "change the conversation" by illustrating how savings translate into income, he said.

Roger Ferguson Jr. described how dire the situation has become for many approaching retirement. Ferguson, president and chief executive officer of TIAA-CREF, said the average 401(k) balance had slipped from $65,000 at the end of 2007 to $45,000 a year later. Some 8% of employers have stopped matching contributions. Meanwhile, defined-benefit pension plans are underfunded, the average Social Security monthly payment is $1,160, and the average household spends $3,000 a month, he said. To make up the shortfalls, Ferguson said plan members should increase their contributions to the 10% to 14% range.

Brown said there could be a lot of flexibility in default design. Default annuitizations could be immediate or laddered over five years to reduce inflation risk, for example, he said. Plan members could be allowed to opt out of the lifetime payments and get their assets back minus payments received, he said.

Jody Strakosch said plan sponsors are also interested in doing the right thing, as there is evidence that if plan members withdraw money, chances are they will spend it and not make it last. Strakosch is national director, Institutional Business-Strategic Alliances, MetLife.

The Pension Protection Act of 2006 enabled employers to automatically enroll employees in retirement plans, with the option to decline. Strakosh said this has significantly increased the number of people in retirement plans and gives proponents of automatic annuitization a reason to believe the default option would work there as well.

Strakosch said the idea is attracting interest from all parties, including record-keepers. Congress and the U.S. Department of Labor are also interested, she said. But she added that the issue is still in an early phase.