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Better Lump Sum Info Boosts Plan Participant Outcomes

Among DB plan participants who were given a choice between a lump sum or an annuity, fewer than half 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.

By John Manganaro editors@assetinternational.com | April 11, 2017
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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 

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