Participants, Plan Sponsors Need More Education on Annuities, Guaranteed Income, Study Shows

Pensions, Social Security and annuities are the three main financial sources that can provide income in retirement, but a recent study by the Western & Southern Financial Group and LIMRA found that few participants are properly educated about annuities.

Because access to pensions is less common and Social Security faces future funding challenges, Western & Southern’s “Income Outcomes: Retirement Planning Confidence Study” argued that there is a need for improved annuity knowledge.

Almost half of individuals surveyed who do not own annuities do not know anything about them, according to the report. A significant majority of all those surveyed (83%) believe a guaranteed monthly income source is very or extremely important in retirement. However, only 66% agreed that annuities can provide exactly that.

Actual annuity owners tended to have a solid grasp on the wide-ranging benefits annuities can bring to their own retirement plan, as they consistently rated the beneficial aspects of annuities higher than non-owners.

“Experience has shown [annuity owners] the value an annuity can bring, and [they] believe it to be more guaranteed, more stable and more important than non-owners, as well as less expensive and less rigid too,” the report stated.

Jill McGruder, senior vice president and chief marketing officer at Western & Southern, said in a statement accompanying the report that having access to the right products, resources and guidance takes on added importance as retirement nears and begins.

Michelle Richter-Gordon, executive director of the Institutional Retirement Income Council and the co-founder of Annuity Research & Consulting, says annuity education is not only necessary on the participant level, but on the plan sponsor level, as well.

Richter-Gordon says plan sponsors are frequently wondering how to protect themselves from legal complaints about annuity portability issues or cost issues, which ultimately causes them to question whether implementing a solution is worth the risk.

“One very important point of evaluation for plans that are considering retirement income is what educational resources are made available through the provider and how does one integrate that into one’s ecosystem to ensure that participants receive the information they need so that there isn’t ultimately a lawsuit associated with guarantees?” Richter-Gordon says.

She adds that plan advisers are well-versed in how to prudently select and monitor assets, but when it comes to liability minimization vehicles, which may be required with insurance products, the plan adviser and plan sponsor education base is “lacking.”

Many plan sponsors are also hesitant to implement guaranteed products because of the fees associated, but Richter-Gordon says fees associated with liability minimization or buying an insurance product are “in no way comparable” to fees associated with asset maximization, such as with a target-date fund.

“Liability minimization is not a feature that is offered on the typical target-date fund,” Richter-Gordon says. “Looking at the cost of a guaranteed solution relative to a nonguaranteed solution is not a reasonable way to make a decision about whether or not to include retirement income in the plan. The reasonable way to look at it is to evaluate cost versus benefit.”

The Western & Southern report found that when it comes to the overall impression of annuities, 65% of annuity non-owners reported neutral sentiment. The gap in annuity perceptions between owners and non-owners indicated an “immense need and opportunity for annuity education,” the report stated.

The survey included responses from 492 pre-retirees, 496 retirees, 282 annuity owners and 706 non-owners.