Expert Viewpoint: Americans Are Turning to Annuities, and Their Employers, in Search of Protection
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A short essay providing a unique perspective on the 2021 Protected Retirement Income and Planning Study
By Jason J. Fichtner, PhD, senior fellow and head of the Alliance for Lifetime Income’s Retirement Income Institute
In the early 1980s, 60% of private sector workers in the U.S. relied on a pension as their only retirement account. That number had winnowed down to a mere 3% in 2020. Alas, the metaphor of a three-legged stool for retirement planning—employer pensions, personal savings and Social Security—that once represented a financially secure retirement for generations of Americans is now a precarious construct consisting of just two legs.
To their credit, Americans recognize that a new structure is needed—one that provides guaranteed income in retirement. According to a joint research study by the Alliance for Lifetime Income and CANNEX, a near-unanimous majority of investors (91%) say it is important that their retirement income plan is designed to provide a guaranteed income payment or principal protection, while more than half of investors (56%) who have an employer-sponsored retirement savings plan are at least moderately interested in investing in an annuity through that plan.
Lawmakers are also taking steps to help Americans do just that. Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the Secure Act, which makes it easier for a retirement plan sponsor to offer an annuity option in a defined-contribution plan. This provision enables employers to offer an annuity option (traditionally associated with defined-benefit pensions) within a defined-contribution retirement plan. A bipartisan effort is also underway to pass “Secure Act 2.0,” which might offer additional measures to compensate for the increasing absence of pension plans.
Employers have always been fundamental to our nation’s retirement readiness—as evidenced by the fact that more Americans have an employer-sponsored plan than any other retirement account other than Social Security. According to a 2020 study by the Department of Labor’s Bureau of Economic Statistics, 67% of private sector workers had access to private retirement accounts. Fifty-two percent of them only had access to defined-contribution plans and 12% had access to both a defined-contribution plan and a defined-benefit plan. Only 3% of private industry workers have access only to a pension—a number that continues to fall.
For many decades, Americans have relied on their employers to help them prepare for a financially secure retirement, initially in the form of a pension, and now in the form of 401(k)s and, increasingly, annuities. The popular narrative in retirement security circles today is that the shift from pensions to defined-contribution plans has moved the burden of providing for retirement security from the employer to the individual. And while this may be true in a technical sense, the Alliance-CANNEX study (among others) contributes to the growing body of evidence that suggest employees are still looking to their employers for retirement planning guidance and assistance. The demand in the workforce for employers to provide the tools needed to guarantee lifetime income in retirement is irrefutable.
The effective elimination of private-sector pensions has not absolved employers of the responsibility to innovate new approaches to workplace benefits.
The effective elimination of private-sector pensions has not absolved employers of the responsibility to innovate new approaches to workplace benefits. For those that accept this responsibility, the good news is that there is an increasingly robust toolbox to create the financial protection their workers are asking for.