People Like ‘Guaranteed Income’ Over an ‘Annuity’
Not only does a name change increase the appeal of annuities, but framing them as insurance against running out of money in retirement does even more so.
What’s in a name? A lot when it comes to annuities, according to a recent Morningstar study.
Stan Treger, a senior behavioral scientist at Morningstar, set out to discover whether the title of a product, as well as the thought of running out of money during retirement, influences people’s evaluation of annuities. In his study report, he notes that annuities have been touted by lawmakers, regulators and others in the retirement plan industry as the answer to the question of how defined contribution (DC) plan participants turn their savings into income in retirement. Treger also notes that annuities have not been popular, and some studies suggest this could be because of their complexity or because of people’s unwillingness to let go of control of a lump sum of amassed savings.
The study included 1,067 U.S. residents who are older than 30 and employed. Per random assignment, study participants were asked questions about a product framed as either a “guaranteed stream of income for life” or as “an annuity.” Treger found that study participants were more willing to exchange a portion of their retirement savings when the product was called a guaranteed income stream than when it was called an annuity.
Overall, participants reported being concerned about the prospect of running out of money during retirement. Some study participants were asked about this concern before being asked about the willingness to exchange a portion of retirement savings for either a guaranteed income stream or an annuity. Treger found that those concerned about running out of money in retirement were more willing to exchange a portion of retirement savings for either one, regardless of what it was called.
The study also found that, in general, participants were willing to exchange approximately 30% of their savings in an employer-sponsored retirement account for a guaranteed income stream or annuity. But they were not very comfortable with allowing their employers to do this for them.
However, the more that study participants were willing to purchase the product, the more comfortable they were with their employer exchanging a portion of their retirement savings for it, and the larger chunk of their retirement savings they would be willing to exchange, the study report says. In addition, those comfortable with exchanging some of their retirement savings for the product were also more willing to delay their Social Security benefits to maximize their income.
Treger went even further and asked whether study participants preferred to pay a larger lump sum for immediate payments during retirement rather than a smaller lump sum for later payments during retirement. In general, study respondents preferred to pay a larger lump sum for the immediate annuity or guaranteed income stream. However, people who were asked questions about the fear of running out of money in retirement before being asked about the willingness to purchase the product were more likely to prefer the deferred annuity.
Treger concludes that his study shows that simply calling an annuity a name that describes its intended purpose—providing a guaranteed income stream that insures against running out of money in retirement—can make people more open to choosing one.
The full study report may be downloaded from here.
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