The word annuity on building blocks.
“We taught people to save. That’s not enough,” leads off the TIAA Building a Better Retirement 2024 report.
Five years after the passing of SECURE 2.0, making it easier for Americans to save for retirement through annuities, new research from TIAA suggests more employers are primed to offer lifetime income, but adoption of these products may be hindered despite growing interest due to a lack of "annuity fluency."
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Developing “annuity fluency” echoes the challenge of learning about target-date portfolios for employers. Target-date portfolios, first offered in 1994, languished until the 2006 Pension Protection Act allowed them as a qualified investment default alternative. Today, nearly 90% of 401(k) and 403(b) plans offer target-date portfolios, almost always as the default option, according to TIAA.
Similarly, most employers understand the basics of annuities but need help getting conversational about them with employees, according to the report:
- Only 37% of sponsors say they can articulate the value and importance of annuities.
- Among sponsors planning to offer annuities, the top two barriers are a lack of understanding among decision-makers (39%) and complexity (39%).
- For those not planning to offer annuities, lack of understanding (43%) is the No. 1 barrier.
SECURE 2.0 may be the catalyst for employers’ interest in adding an annuity to their plans, but the pandemic significantly hampered the amount of time they could devote to research, according to TIAA. Employers are caught between momentum for change and the need for greater understanding and they’re looking to consultants and providers for more understanding.
TIAA's first annual survey of defined contribution (DC) plan sponsors takes a comprehensive look at the attitudes, needs, and goals of plan sponsors across 401(k), 403(b) and 457 plans. The report covers “how employers are thinking.” On behalf of TIAA, Greenwald Research surveyed 500 C-suite decision-makers across the entire DC landscape.
Employers recognize retirees need help turning savings into reliable income, and 42% of sponsors who don’t offer an annuity expect to add one to their plans in the next two years, according to the report. But will this be enough to help retirees?
Overall, 76% of DC plan sponsors expect demand for annuities will grow over the next five years.
"As pension plans began to wane, employers and policymakers were focused on getting people to save through defined contribution plans," said Kourtney Gibson, CEO of TIAA Retirement Solutions. "Now with growing uncertainty around Social Security and people living longer lives, we need to help people manage their savings to last through retirement. Our research indicates that plan sponsors are open to offering lifetime income but need support to add it to their plans—and consultants have a huge role to play in delivering that help."
Eighty-five percent of sponsors say that employees need additional sources of guaranteed lifetime income beyond Social Security, and 59% cite Social Security's uncertain future as the top external factor driving them to add or consider adding annuities to DC plans. They also note increased adoption by other employers (52%) and changing demographics, such as longer lifespans (48%).
Related: Solving the ‘annuity puzzle’ in 401(k)s: Make lifetime income solutions more available
"Plan sponsors told us that, as the lifetime income trend gains momentum, they will be looking for consultants to provide support especially on significant ideas and strategy," said Jason Key, TIAA Retirement Solution's head of consultant relations. "That support can include implementation of annuities in a DC plan—which could have a significant impact on employee retirement security and organizational reputation."
The survey also found that 48% think guaranteed income is a top way to positively impact participants' retirements and 38% are likely to be early adopters of in-plan annuities.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
