A recent survey from Watson Wyatt finds the number of employers planning to offer annuities in their 401(k) plans is expected to grow as companies look for ways to provide workers with a steady distribution of benefits during retirement.
Nearly one in four employers (22 percent) that sponsor DC plans currently offer an annuity as a distribution option, and 10 percent of those who do not offer one are considering adding it, according to the survey.
"Annuities in 401(k) plans were rarely discussed a few years ago," said Robyn Credico, a senior retirement consultant at Watson Wyatt in a press release. "But in the recent economic downturn, employees without traditional pension plans could not retire because their 401(k) balances were decimated. With this weakness in 401(k) plans now exposed, more employers are exploring ways to minimize their employees' exposure to risk — including the use of annuities."
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The survey found that the main reasons plan sponsors did not offer an annuity were a lack of participant demand (56 percent) and administrative complexity (36 percent). Also, separate Watson Wyatt research conducted previously found that employees' interest in life payout annuities is strongly influenced by how the pros and cons of longevity insurance are weighed.
"Managing lump sums is a huge challenge — even for experienced investors. Given last year's steep decline in retirement savings, employers can expect employee attitudes towards annuities to shift, as perceptions of risk are heightened," said Mark Warshawsky, director of retirement research at Watson Wyatt.
There are also clear benefits for employers, who would find it easier to predict and plan for employee retirement. However, due to a perceived lack of demand as well as shortcomings of many providers' offerings, the market for annuities is still seen as immature by plan sponsors. It's a cycle that can be broken by employers through the design of good distribution strategies for retirees and effective communication to make the advantages of such annuities clear to employees."
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