Participants Prefer Monthly Retirement Paychecks Over Flexible Withdrawals

The majority of respondents to a survey by Capital Group also noted they were potentially interested in annuity and lifetime guaranteed income solutions—options that many plan sponsors are reluctant to offer.

As participants review their future income projections in retirement, more are considering building monthly retirement paychecks with the investments and savings they’ve collected throughout their careers rather than using flexible withdrawal options, according to Capital Group’s newest “Wisdom of Experience” investor survey.

Nearly nine out of 10 survey respondents (87%), including men and women across every generation, said creating a monthly retirement paycheck is an “appealing option” to them, according to Capital Group. Eighty-eight percent also indicated that continuing to invest in their nest egg after retiring is crucial to supporting their post-work life.

The majority of respondents to the investor survey also noted they were potentially interested in annuity and lifetime guaranteed income solutions—options that have seen only a slight uptick in implementation since the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in late 2019. The SECURE Act provides a fiduciary safe harbor for selecting an insurer/vendor of guaranteed retirement income contracts. 

Three-quarters of those surveyed (75%) said they “liked the idea” of buying an annuity that provides guaranteed lifetime income for themselves and their families, with Generation Xers (78%) and Millennials (80%) showing a stronger preference than Baby Boomers (61%).

While participants are slowly showing more interest in lifetime guaranteed income solutions, most employers do not currently offer an annuity option in their defined contribution (DC) retirement plans, with many reluctant to do so. A recent Alight solutions study found only 3% of plan sponsors said they are “very interested” in offering annuity options to their DC plans. Just 12% said they already do so.

Three-quarters of plan sponsors surveyed in Alight’s study indicated they don’t intend to offer annuities in their plans because of fiduciary concerns. And 89% of sponsors in the survey said they were apprehensive about the operational and administrative processes when offering annuity services, while three-quarters said they were concerned about the number of participants who would use the benefit. Seventy percent cited difficulty with participant communications as an impediment to implementation.

But retirement planning experts note more employers and participants are seeking out education and communication strategies on annuity products. Because experts say the two groups tend to misinterpret annuity products as costly or high-risk, adding educational opportunities can help with that assessment.

“Our near-term expectations for 2020 and early 2021 will be a lot of education with retirement planning committees, with implementation following that later in 2021,” Kerry Bandow, a senior consultant for Russell Investments in Seattle, said during an interview last year with PLANSPONSOR. “It will be a gradual implementation. I don’t think we’re expecting to see a rush to the door, as committees are looking at the need for education and making participants aware.”

Adding lifetime income projection tools could make more participants interested in annuities, said Sherrie Grabot, founder and chief executive officer at GuidedChoice, during a SPARK [Society of Professional Asset Managers and Recordkeepers] discussion in November. “You have to show the income coming out of the defined contribution [DC] plans,” she said. “It increases savings rates when they see that income level.”