There has been a significant increase in interest around guaranteed income, especially for defined contribution plans recently. However, the uptake of annuities in DC plans has been relatively slow, despite innovations in the space and growing agreement about their potential value.
Products that offer guaranteed income, such as annuities, have the potential to radically simplify the income decision process for retirees. What is less clear, however, is if there is a correlation between owning an annuity and how likely a DC participant is to trade their account in times of market turmoil?
I’m not familiar with any other research on this particular topic, but was able to find data on approximately 730,000 participants who had an in-plan annuity (technically, a variable annuity with a guaranteed lifetime withdrawal benefit, or GLWB). had access to. I was able to compare the business decisions of those who owned the product and those who did not during the 2020 calendar year and recently released research on the topic.
First, I think it’s important to note that participants using any sort of professionally managed portfolio solution were significantly less likely to trade in 2020 than those who were self-directing. This isn’t necessarily surprising, as it is in line with other research I’ve published on the subject, but it does reinforce the importance of using professionally managed investments to participants, whether it’s target-date funds or managed retirement. Have an account
With regard to annuity allocation, the analysis focused on older participants aged 55 to 70 as they would typically be considered to benefit the most from the strategy.
Overall, there is clear evidence that (older) participants who had a higher allocation to an annuity that provided guaranteed lifetime income were less likely to do business during 2020. The potential for partner trading decreased as the allocation of the guaranteed income product increased. This relationship was present when all participants were grouped together and when participants were segregated into different paths to annuity ownership, such as professionally managed portfolios (default and opt-in) and self- Director.
Additional regressions suggest that the tradeoffs we see from older participants are not related to their age (i.e., a 67-year-old participant who owned an annuity was no less likely to trade than a 57-year-old participant , keeping everything else constant) but there appears to be a balancing effect, whereby the participants with the highest balance traded the least. Conceptually, this makes sense, as it suggests participants who were potentially most affected by volatility (i.e., those with large balances) were less concerned when they knew they guaranteed lifetime income. Was.
Overall, this research shows that solutions with more predictable sources of income in DC plans have the potential to not only improve retirement outcomes for participants, but also improve investment behavior. By providing greater certainty about retirement income levels, participants appear less likely to transact and make poor market timing decisions. More customized advice and solutions at the participant level and additional non-guaranteed investments that are suitable near or in retirement should also help.
As more retirement income products come to market, hopefully, there will be additional research on the topic to better help advisors and plan sponsors understand how participants respond to the allocation of different products within a DC plan.
David Blanchett is Head of Retirement Research and DC Solutions at QMA, PGIM’s quantitative equities and multi-asset division.
