Including a source of guaranteed income into a 401(k) plan is becoming increasingly important, while an annuity is often misunderstood by employees or pre-retirees. Despite the benefits of a guaranteed income stream for life, not enough defined contribution (DC) plans include enough options in the plans, and not enough participants are seeking out an annuity. This dilemma is often referred to as the ‘annuity puzzle” by economists.

“The annuity puzzle is a concept that suggests retirees don’t utilize annuities at the level that would generally be considered optimal by retirement economists,” said David Blanchett, Head of Retirement Research at PGIM DC Solutions. “Retirees face challenges when it comes to spending down savings in retirement given the myriad of uncertainties that exist around market returns, longevity, etc.