A Growing Trend: Employees Opting for Lifetime Income Over Traditional Retirement Accounts

Background and Current Trends

Traditionally, retirement plans like 401(k)s and IRAs have been the popular choice. However, there’s a notable shift in employee preferences towards lifetime income options. An analysis of recent defined benefit plan terminations reveals that 34% of employees over age 55 choose to convert their retirement savings into lifetime income provided by insurance companies. This choice is particularly prevalent in scenarios where employers oversee competitive bidding processes for these insurance products.

Understanding the Utilization Rates

Despite the historically low uptake of insurance company annuity conversions in retail markets and in-plan defined contribution offerings, a different trend emerges when these options are presented more effectively. When employees are given the option as part of a defined benefit plan termination, the choice for lifetime income seems more appealing. This suggests that the way these options are framed and offered significantly impacts employee decisions.

A Case Study of Success

A closer look at 16 employers since 2007 shows a different strategy yielding higher conversion rates. These employers allow retiring employees to transfer a portion of their 401(k) balance into the company’s defined benefit plan for lifetime income options. This approach, clarified and protected under IRS Revenue Ruling 2012-4, has led to almost 25% of eligible balances being converted – a stark contrast to the lower rates seen in other scenarios.

Key Factors Influencing Employee Choice

Several factors contribute to the higher uptake in these cases:

Risk Mitigation: Employers manage the added risks by earmarking hedged, long-bond portfolios or including these liabilities in their broader portfolio strategies.

PBGC Premiums: For participants already in the defined benefit plan, there’s no increase in premiums, adding an incentive to opt for this conversion.

Plan Sponsor Benefits: Companies offering these options can benefit from workforce management advantages and direct financial savings. As employees gain retirement security, they are less likely to delay retirement, which can lead to cost savings for the employer.

Looking Beyond Traditional Options

The data indicates a strong employee interest in lifetime income options, but their popularity hinges on how these options are presented and implemented. Employers should consider innovative ways to offer these opportunities, moving beyond traditional defined contribution plan markets to meet employee needs effectively.

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