In the past two years, the government decreed the newavailability of retirement products that promised to pave the wayto post-career happiness by answering the direst needs of saverseverywhere. Both the MyRA and the Longevity Annuity came out withsuch fanfare you’d think regulators had parted the Red Sea.

It turned out not to be the Red Sea, but merely a faded red canof New Coke. Sure, the wizards down in research and developmentcould design anything based on any specs. And the policy wonksthought they had a winner with these particular specs. Regulatorsthought the MyRA and the QLAC offered the answers to whatacademic research insisted were the most pressing wants of theworking class. So the financial engineers built it, only theydidn’t come.

We’ll set aside MyRAs as a fait accompli,and, instead, focus on the much heralded longevity annuity.

After years of the incessant drumbeat of “retirees wantguaranteed income,” the powers that be ordained that longevityannuities could legally be placed in 401k plans and IRAs beginning July 1,2014 (within certain limitations, perhaps a tacit recognition ofthe silliness of the idea in the first place).

In hindsight, we could have probably done a simple pricinganalysis before we even started and concluded QLACs just couldn’tcompete against the alternative. (For an example of one suchanalysis, see “Square Peg QLACs Can’t Seem to Fit in 401kFiduciary Round Hole,” FiduciaryNews.com, August 4,2015.)

Forget the pricing problem, let’s get to the real problem withthe QLAC? Not even favorable pricing can overcome thisobstacle (and woe be the insurance company that thinks they canunderprice this challenger).

As alluded to before, the QLAC seems to have been designed byresearchers, not by the potential buyers.

The bean counters behind those ivy-covered walls insisted themost rational decision a retirement saver could make was to buy alongevity annuity. Why?

Because the greatest fear people claim to have is the fear ofoutliving their money. QLACs represent a form of insurance thatcould mitigate this fear.

Perfect, right? A match made in heaven. Except for onething.

Researchers made two unfortunate assumptions. First, theyassumed all consumers exhibit a cold rationality far beyond that ofmortal men. Second, and directly related to the first assumption,advocates of QLACs failed to take into account the psychologicalupside of alternatives.

Here’s what I mean about that second assumption, and I’m sureyou’ve seen analogous examples of this concept in plenty of otherplaces.

Take any random group of people. By definition, their expertiseon a given subject would be distributed along the classic bellcurve.

Half would be above average. Half would be below average.

Now, ask each one of them how they would assess their relativestrength on this particular subject, and, more often than not, morethan half the people would rank themselves “above average.”

Remember, you already know only half the people in this sampleset are above average.

What accounts for this behavioral tendency towardsoverconfidence?

It’s called “the Lake Wobegon Effect.” You remember GarrisonKeillor’s popular PBS show called “Lake Wobegon” – where all thewomen are strong, all the men are good looking, and all thechildren are above average.” Well, I guess, in our own eyes, we’reall Lake Wobegon children.

Now, I’m not sure overconfidence is necessarily a bad thing(because sometimes it’s the single reason why we succeed well aboveexpectations). But--and here’s the critical point-- imagine theimpact this overconfidence has on the typical consumer’s valueanalysis of a QLAC.

Yes, they may be worried they might outlive their retirementsavings, and, yes, they recognize others have, indeed,outlived their retirement savings.

But brush this logic away with a sweep of their hand and insist“I’m above average and I can figure out a way to make sure thisdoesn’t happen to me.”

The QLAC may be able to part the Red Sea, but it can never partLake Wobegon.