Why Annuities Deserve a Seat at Every 401(k) Table
I was interested to read the recent ThinkAdvisor article titled "Emergencies Make Annuitization a Poor 401(k) Default Option," by Alicia Munnell. I also then read her commentary titled "Annuities in 401(k) Plans Aren't All They're Cracked Up to Be" upon which the article was based.
While the commentary cited new data regarding how emergency expenses can affect retirement assets, it also showed a profound lack of knowledge about annuities, their features and benefits for retirees.
Like so many, Munnell shared generalizations and broad conclusions about annuities based on what appears to be little understanding of the many product types and features that exist.
She dismisses the entire category by making judgments based on an assumption that annuitization — irreversibly turning over assets to an insurance company in exchange for a lifetime income stream — is the only option available to annuity purchasers.
This not only is untrue; it's actually an exceedingly rare use case.
Unfortunately, Munnell's narrow argument is not unusual. She seems to base her opinions on the single premium immediate annuity, a product that generally represents less than 4% of annual annuity sales.
A SPIA is designed to provide income immediately through annuitization, although there are many configurable options available in SPIAs to provide some flexibility.
A SPIA is distinct in this way — proactive annuitization of other annuity products (for example, exercising the annuitization feature of a variable annuity — is so exceptionally rare that in 20 years in the annuity business I do not believe I have seen it happen.
Why is this important? Because Munnell is trying to make the case that annuities don't belong in a 401(k) plan because of their illiquidity and the potential that retirees may need access to their funds for emergencies.
Her argument ignores the reality that income-generating annuities typically do so through features that provide ongoing access to funds that haven't been depleted by withdrawals.
That's like any other assets a retiree may have in a portfolio.
