Watson Wyatt Says Annuities will Improve DC Plan Options

August 6, 2007 (PLANSPONSOR.com) - Employers will begin offering annuities as an investment option within 401(k) plans as a way to ensure greater retirement security on behalf of their employees, predicts Watson Wyatt Worldwide in a recent white paper.

According to the consultant, retirees should consider annuitizing at least the portion of assets they need to support basic consumption needs and then the remaining assets can be invested more aggressively to cover other consumption and bequest motives.

However, to make annuities an affordable option, employers are looking for a broader range of products, such as simple, institutionally priced immediate and deferred annuities at retirement to flexible, portable in-service annuities, according to the paper.

Watson Wyatt argues that participants trying to figure out how to manage a lump-sum payout only adds to the difficulty of trying to stretch their assets over the rest of their lives.Some retirees purchase annuities on the open market, but the prices for such products are generally high and are significantly affected by interest rate fluctuations and other factors, according to the white paper.

“Purchasing an annuity adds another level of complication to retirement,” said Mark Warshawsky, director of retirement research at Watson Wyatt, in the press release. “Employees must not only plan out their investment strategies, but also purchase annuities at the right time. Waiting a few months can mean the difference of hundreds of dollars in their monthly annuity income if interest rates change.”

Some of the reasons Individuals have so far been reluctant to annuitize their retirement savings are:

  • Substantial existing annuitized wealth in pension benefits and Social Security
  • Limited institutionally priced offerings (i.e., lack of pricing transparency, high administrative costs and commissions);
  • Unattractive pricing attributable to buyer information advantage (i.e., those interested in annuity protection might be healthier than the population in general); and
  • Unattractive product features such as no income inflation protection or ability to satisfy wealth transfer objectives.

For a full copy of the Watson Wyatt white paper go here .