Better Lump Sum Info Boosts Plan Participant Outcomes

A new survey analysis conducted by Harris Poll on behalf of MetLife explores consumers’ attitudes and decisionmaking with regard to lump sums and income annuity payments.

According to the “Paycheck or Pot of Gold Study,” of the individuals who took a lump sum from a retirement plan, 63% made “major purchases” within the first year. Nearly a quarter (22%) gifted a significant portion of this money to an individual or a charitable group. A striking 21% of all participants who selected a lump sum at some point say they depleted it­—taking just five and a half years on average to spend the dough; at the same time one in three with lump-sum cash remaining (35%) are concerned about the money running out while it is still needed.

Researchers warn that many in this camp quickly regret their choices about lump sums: “Roughly one-third (31%) of those with major spending regret their spending in hindsight, and 23% who gave money away lament their generosity. Some have even had to subsequently cut back on other spending for fear of running out of money.”

MetLife found that lump sum recipients “appear to have more financial concerns than annuitants.”

“Fifty-two percent of participants who chose a lump sum concede that, if they had taken an annuity, their budget would be more predictable, and 34% say it would be easier for them to pay for basic necessities,” the survey finds. “In contrast, defined benefit (DB) and defined contribution (DC) plan annuitants believe they are more financially secure because of their annuity than their friends and neighbors who don’t have guaranteed income from an annuity (58%), and a nearly equal percentage believe they are more confident in their financial decisionmaking (56%).”

Like other analyses in this area, the MetLife research finds lasting confusion around the basic concepts of annuitization and lump sum distributions among plan participants. People generally struggle with weighing the relative tax implications of each approach, for example, or how to run in-depth comparisons about how lifespan and health considerations should inform thinking around purchasing various types of annuities versus taking lump sums. The research broadly makes the argument that employers have an important role to play in helping their employees understand and face longevity risk. 

NEXT: Participant preferences for lump sums 

The MetLife survey report outlines some interesting history pertaining to the use of annuities versus lump sums. 

“A separate development that overlapped to some degree with the beginning of a decline in DB pension plans was a change in how the benefits were paid to retirees or terminated vested workers and their beneficiaries,” the report explains. “As an alternative to the monthly annuity benefit these plans are required to offer … DB plans added lump sum distributions, often as a means of encouraging early retirement initiatives that became popular in the 1990s. This proved both easy to communicate to, and popular with, employees. Once added, qualified plan anti-cutback rules served to keep these new benefit forms in place.”

Against this backdrop, the MetLife research finds employer’s choices in communicating the relative values of annuitization and lump sum distributions play a key role in how employees ultimately divvy up their money. Broadly speaking, defined benefit plan participants achieve nearly twice the amount of annuitized income replacement compared with their DC counterparts, and this has a lot to do with their plan sponsors' willingness to discuss and confront increased longevity as a material workplace issue. 

“The average lump sum amount for those who took a lump sum from their DB plans was approximately $192,357 ($232,507 for men compared to $144,793 for women),” MetLife finds. “One in five DB plan participants who took a lump sum from their DB plans (22%) did so in conjunction with receiving notice of a lump sum window. The average DC plan balance at retirement was approximately $239,792 ($274,859 for men, compared to $188,178 for women). For those receiving monthly annuity payments from their former employer’s DB plan, the average monthly payment is about $2,661. The average monthly annuity payment among those who receive annuity payments from their DC plans is about $1,691.”

The report concludes that key information about longevity and the risks of running out of money during a longer-than-expected retirement is sorely lacking. Some limited information is available today, however, including information focused on the tax treatment of both payment options—available to 39% of DB plan participants and 46% of DC plan participants.

“Among DB plan participants who were given a choice between a lump sum or an annuity, fewer than half (45%) said that, at the time they made their decision, they recall being presented with information comparing the total amount of the lump sum versus the total value of the annuity payments,” MetLife's analysis continues. “This indicates a potential opportunity to improve upon the information provided to DB plan participants because, as the American Academy of Actuaries has noted, when lump sum distributions are offered, it is critical that participants receive information that is sufficiently clear and complete to enable them to make informed decisions regarding whether to accept the lump sum offer.”

NEXT: DC versus DB decisionmaking 

The MetLife research shows DC plan participants who selected an annuity were more likely than those who selected a lump sum to have been provided with a paper statement illustrating how much income their DC plan would provide in retirement (55% vs. 28%).

“Additionally, 39% of DC plan participants who chose an annuity say they received a projection estimating how many years the money in their DC plan would last, compared to 30% who chose a lump sum,” MetLife reports. “For those individuals who had only a DC plan but no DB plan, only 6% indicated that they conducted online research when making the decision of what to do with the balance in their DC plan.”

Discussing the research effort with PLANSPONSOR, Roberta Rafaloff, vice president, Institutional Income Annuities with MetLife, suggested it was somewhat surprising to see that DC plan sponsors and their recordkeepers frequently tout that online tools are made available to their plan participants to project the income they may need in retirement. Many plan sponsors do not seem to grasp that simply making tools available to participants is not enough—something of a push or nudge is required for any such offering to take full effect. 

“The low utilization rate of the do-it-yourself approach is of concern,” she warns, “especially given that DC plans will increasingly become the primary or, in many cases, sole source of retirement income for many workers. This underscores the need for a more standardized approach to conveying the value of retirement assets in income terms, such as through lifetime income disclosures on DC plan benefit statements for participants.”

Rafaloff observes that an individual’s risk tolerance appears to impact whether they select a lump sum or annuity, a fact that employers can keep in mind as they attempt to influence behavior in this area: “Perhaps not surprisingly, 46% of DB and DC plan participants who selected a lump sum and are, therefore, subject to the fluctuations of the stock and bond markets, described themselves as risk-takers, compared to 36% of those who selected a guaranteed annuity.” In addition, 64% of DB and DC plan participants who took the annuity (vs. 54% who took the lump sum) described themselves as “risk-averse.”

“Among DB plan participants, 62% of those who took a lump sum consider themselves risk-takers, while 62% of those who took an annuity say they are risk-averse,” the analysis shows. “Among DC plan participants, 42% of those who withdrew part or all of their DC plan balance self-identify as risk-takers with their investments, while 67% of those who chose to annuitize their DC plan balance say they are risk-averse.”

For more research and information, visit www.metlife.com.