By Joe Anzalone, Michael Clark, and James Walton
The Growing Demand for Lifetime Income Products
Lifetime income products are all the rage. From talking with companies, it’s clear that retirees are looking for lifetime income that makes sense for their situations. For companies that either never had a defined benefit pension plan or which froze their pension plan many years ago, that desire among retirees or near-retirees seems to be even greater.
Popularity at Retirement Conferences
It’s impossible to attend a retirement conference without there being at least one session dedicated to lifetime income in defined contribution (DC) plans. While speakers tout the benefits of lifetime income products in DC plans, and some are even brave enough to acknowledge the shortcomings of various solutions, no one dares mention that the in-plan solutions available in the market today short-change half the population.
Gender-Neutral Life Expectancies: An Issue
The reason: The products available in the market short-change males. Because lifetime income products are embedded within qualified retirement plans, certain requirements apply. One of these requirements is that when a plan converts an account balance to a lifetime annuity, the conversion basis must be based on gender-neutral life expectancies. The plan must treat men and women the same when converting their balances to an annuity, even though women are expected to live longer than men. As a result, men receive less per month than they would receive if the calculation could reflect true life expectancies.
Hypothetical Annuity Comparison
The table below looks at the differences in a hypothetical annuity that could be provided to a person age 65 with $500,000 that they want to convert to monthly income for life. For simplicity, we’ve assumed that they purchase a single life annuity, and the interest rate basis is 5.35%[i] (the June 30, 2024 FTSE Pension Liability Index Discount Rate).
Because the lifetime income products available in the market use gender-neutral mortality, the hypothetical retiree would receive a monthly annuity benefit of $3,377, regardless of gender. But if the plan could use the retiree’s gender-specific life expectancy, a male retiree should receive $3,474 per month. The requirement to use a gender-neutral mortality assumption means that the male retiree is short-changed by almost $100 per month. The difference can be even greater for participants that are older.
The Female Perspective
You may think that a female would get a good deal, receiving $3,377 instead of $3,288. But that would only be the case if insurers didn’t anticipate that females would be more likely than males to elect annuities. With an in-plan annuity option, if the insurer anticipates that females are more likely than males to elect annuity options, because the gender-neutral assumption is better for females than it is for males, the insurer will tilt the mortality assumption toward one that is appropriate for females, thereby reducing or eliminating the subsidy otherwise afforded to females.
Industry Conversations and Surprises
From conversations we’ve had with companies that have been exploring lifetime income solutions, the requirement to use gender-neutral mortality is one that catches them by surprise. The industry seems to want to brush this feature under the rug for fear of scaring off potential plan sponsors. While we are proponents of lifetime income in retirement, current market solutions still leave a lot to be desired.
Advice to Plan Sponsors
The message to plan sponsors exploring lifetime income solutions is to be aware of what the providers aren’t talking about.
[1]Annuity values calculated using the 2023 IRS Static Mortality Tables for Male and Female Annuitants and the 2023 IRC Section 417(e) mortality table.
