Behavioral economics shows that when workers reach retirement, they prefer a lump-sum distribution. For many, purchasing an annuity is simply not that appealing.

However, annuities do allow retirees to exchange accumulated wealth for a lifetime stream of guaranteed income.

The lump-sum distribution is "a big, fat check, probably much bigger than anything you have seen before, which you have total control and flexibility over," Kelli Hueler, CEO of Hueler Companies, told attendees at a May conference on retirement income, sponsored by AARP.

"You take that check, and the world looks good. People are also shown these wonderful charts on how much their accumulated savings will be worth in 20 years," Hueler explained.

An annuity, however, is seen as a big black hole where they lose all control and have to trust the insurance and securities industries.

Yet as 78 million baby boomers approach retirement, employers will have to notch up their retirement education message to emphasize asset decumulation, in which annuities are seen as playing a critical role, experts contend.

"More employers are starting to pay attention to the decumulation phase, which I think is motivated, in part, by workers' interest in spending assets in retirement," said Lynn Dudley, vice president of retirement policy at the American Benefits Council, an employer group based in Washington, D.C.

Financial experts tout annuities because Americans are living longer, and many will probably outlive their retirement assets. Moreover, few employers are providing defined benefit pension plans.

The conversation about aging, lifetime income and income sufficiency in the public sphere is certainty creating more awareness about annuities, said Hueler, whose Minnesota-based company studies retirement funds. "The bottom line is we have to design a new framework for delivering annuities to individuals as they transition into retirement," she noted.

The downsides of using an annuity are the associated fees and the chance that you could die earlier than expected, before you've received the full amount of your nest egg from the annuity provider.

Annuity education

"We have helped our employees to build assets for retirement through pensions and 401(k) plans, but without education on spending retirement income, we are on the verge of sending them out the door ill-equipped to manage their retirement assets," said Sally Hass, benefits education manager at Weyerhaeuser, a Washington-based forest products company.

At Weyerhaeuser, which employs about 55,000 workers in the United States and Canada, about 80% of workers elect a lump-sum option, rather than an annuity option, on their pension, explained Hass, who believes the decision is driven more by emotion than education, facts and data.

"We need to put Americans on a retirement budget. Rather than having them think about spending down assets in retirement, we need to think about having their assets generate that monthly paycheck that can last a lifetime, she remarked. "After all, they have the experience of living on a paycheck."

Hass sees the workplace as an ideal venue to not only offer workers the education and tools to sustain a lifetime income, but also expose them to the financial services community.

Retirement education programs in the workplace should teach workers how to purchase an annuity, experts say. But equally important, the programs have to stress managing a budget based on the investment returns of the retirement assets, thus spending the principal cautiously.

"As protective as we have been inside the workplace in helping employees build assets for retirement, I am sometimes fearful that, despite our effects to educate workers, many are simply not prepared to manage the nest eggs," Hass confessed.

If more is not done in helping workers to learn about decumulation strategies for retirement assets, then many baby boomers could be a burden to their families and the nation and will not have the quality of life that they planned.

"In working a lifetime, they deserve a better outcome," Hass added.

Income for life

With annuity education, the language of retirement is changing in that plan sponsors have told participants to save, save, save and accumulate those assets. "Now, we are asking participants to start thinking about creating a retirement income stream," said Jody Strakosch, national director of retirement and savings at MetLife.

About 30% of defined contribution plans offer an annuity option, but only 3% to 6% of plan participants utilize that option, according to Strakosch.

Employers look at offering annuitization in different ways, such as option within the plan or as an IRA rollover.

Annuities inside a DC plan as an investment option are participant-directed, and contributions are made through payroll deduction and transfers. In addition, in-plan annuity investments are typically fixed or variable vehicles.

The mortality basis for pricing an annuity option within the plan is gender neutral, which is advantageous for women, given that their life expectancy is higher, compared to men.

However, "a 401(k) plan that offers access to annuitization though an IRA rollover capability will have gender-specific pricing because it's functioning outside the plan," explained Hueler.

Renee Schaaf, vice president of retirement and investor services at Principal Financial Group, said participants should consider indexing annuities to inflation, which takes risk off the table in terms of inflation and longevity.

A few plan sponsors are offering an annuity as an accumulation option within the DC plan. For example, employers match into a deferred accumulation annuity. Under the option, an employee nearing retirement can decide whether he or she wants income situated for one or two individuals and whether the annuity has an inflation-protection option.

"You have the opportunity to customize the annuity at the time you are going to be taking money down," explained Starkosch. But equally important, "participants accumulate a right to a guaranteed income for life."