By David Blanchett and Michael Finke

Research Overview

Most American workers save for retirement in defined contribution (DC) plans using default investments, primarily target-date funds. Adding annuities to a default investment offers two potential benefits over retail annuities: First, passive acceptance of defaults will likely result in an increase in the percentage of workers who receive guaranteed lifetime income. Second, DC participants, and especially those participants who invest in defaults, may not live as long as retail annuity buyers, resulting in a mortality pool that allows lower fair annuity pricing. We estimate that the average DC participant has a longevity that is about two years less than the average retail annuity buyer. The more-attractive mortality pool of DC participants would result in annuity income that is 7.4 percent higher for women and 2.7 percent higher for men. Respondents who indicate a preference for investing through defaults exhibit characteristics associated with expected longevity that is lower than that of average DC participants. This suggests an additional pricing improvement to annuities that are placed in investment defaults. Welfare analyses demonstrate that a risk-averse woman with $500,000 of retirement savings who invests in a default could increase her total welfare in retirement by 18.8 percent upon annuitizing 25 percent of her wealth and by 35.0 percent upon annuitizing 50 percent of her wealth, versus not annuitizing.

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About the Authors

David Blanchett is managing director and head of retirement research with PGIM.

Michael Finke is professor of wealth management, WMCP program director, director of the Granum Center for Financial Security, and Frank M. Engle Chair of Economic Security at the American College of Financial Services.

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