Gripped by how the financial crisis drastically reduced some workers’ 401(k) accounts, more employers are taking a fresh look at annuities as a source of retirement income, according to new research.
About one in four companies (22%) that offer DC plans provide an annuity as a distribution option, while 10% of those who don’t supply one are considering adding it, reports Watson Wyatt (now called Towers Watson). The 2009 research, which was conducted in March and April, represents the responses of 149 employers.
“Annuities in 401(k) plans were rarely discussed a few years ago,” says Robyn Credico, a senior retirement consultant at the HR consulting firm. “But in the recent economic downturn, employees without traditional pension plans could not retire because their 401(k) balances were decimated. With this weakness in 401(k) plans now exposed, more employers are exploring ways to minimize their employees’ exposure to risk — including the use of annuities,” he adds.
Still, hurdles persist when it comes to employers adopting annuities to their 401(k) plans. For example, the key reasons plan sponsors did not offer an annuity were a lack of participant demand (56%) and administrative complexity (36%), according to the survey by Watson. In addition, other research by the firm shows that workers’ interests in annuities are dictated by how they view the importance of longevity insurance.
“Managing lump sums is a huge challenge — even for experienced investors. Given last year’s steep decline in retirement savings, employers can expect employee attitudes towards annuities to shift, as perceptions of risk are heightened,” says Mark Warshawsky, director of retirement research at Watson Wyatt.
