Sex can make a difference in the annuity business. That is, sex in terms of the gender of the buyer. This is a point that agents and advisors need to keep in mind when helping clients decide whether to take the lump sum option offered by their traditional pension plan or whether to take the in-plan annuity option.
That doesn’t sound very sexy, but it has an eye-catching aspect. It also presents some possibilities for annuity experts to be of service to their clients.
Here’s the skinny: Traditional pensions — the so-called defined benefit (DB) plans, in industry parlance — are required to use gender-neutral annuity rates within their plans, according to a discussion paper from the American Academy of Actuaries. By contrast, gender-distinct rates are used in annuities sold outside of those plans.
That differentiation may not mean much to people while they are in their working years. They may not even be aware of it. But when it comes time to retire, those gender-neutral rates can make a financial difference for the departing worker.
As the academy puts it, “Within DB plans, the gender-neutral rates are relatively favorable to males taking lump sums.”
What’s so eye-catching about that? It sets up a follow-the-money scenario that differs between men and women.
Specifically, it creates an incentive for women to elect in-plan annuities (if available) at actuarially favorable rates, the academy said.
Meanwhile, it creates an incentive for men to elect out-of-plan annuities “at actuarially fair rates” (i.e., annuities that use sex-distinct rates) or “to elect annuities less frequently because of the need to go outside the plan.”
This gender-neutral impact “could disproportionately lead males to not annuitize,” the academy cautioned. And that “could jeopardize their retirement security as well as that of their spouses.”
If the man is married and uses the plan’s 100 percent joint-and-survivor option, that can eliminate the disincentive for the man to annuitize, the academy experts allowed.
But all is not lost when participants, especially male participants, elect the lump sum option. A man could elect instead to annuitize the lump sum in a rollover qualified deferred annuity sold in the retail market, noted Noel Abkemeier in an interview. He is a consulting actuary and principal at Milliman.
That annuity would have sex-distinct pricing, which tends to produce more favorable rates for men than gender-neutral rates, said Abkemeier, who co-chaired the team that wrote “Risky Business: Living Longer Without Income for Life,” a 2013 academy paper that comments on gender-based pricing among other retirement issues.
As a result, “the man could possibly obtain a larger monthly income amount than he would by annuitizing inside the plan, as well as having a plan that pays guaranteed income for life,” Abkemeier said.
The lump sum advantage gets an additional boost if interest rates are low at the time that the person makes the election, Abkemeier added. “It’s like bonds; when interest rates go down, the value goes up.”
But even when interest rates are not low, many people take the lump sum option, Abkemeier noted. “They believe they can do as well or better by taking the money and investing it outside the plan.
“In addition, some people choose the lump sum because they want liquidity, so they can access the funds in case of emergency or special need. That can be an important consideration for people who have modest sums saved up for retirement.”
Some pension plans do keep rollover annuities sitting on the doorstep outside the DB plan, so that people who elect the lump sum will have a readily available retail annuity resource if interested, Abkemeier pointed out.
But even though these out-of-plan guaranteed annuity options typically offer institutional pricing and may eliminate many fees and expenses associated with retail annuities, not many participants elect them, according to the Institutional Retirement Income Council (IRIC). In a 2012 paper, “Retirement Income Products: Which One Is Right for Your Plan?,” the IRIC said it has seen “very little usage of these products.”
The reasons for not electing these out-of-plan annuity options are very common ones in the annuity world. One is that people find the annuity purchase decision to be “intimidating and irrevocable,” the IRIC report noted. In addition, people are turned off by several factors, including: the inability to pass any residual balance on to heirs upon death, the depressive effect of the low interest rate environment on the annuity payouts and the uncertainty over whether the issuing company will be able to pay benefit for decades into the future.
These trends and tendencies can present opportunities for annuity professionals. For instance, one way an agent could accommodate a client’s liquidity need is to suggest rolling the lump sum into a retail qualified deferred annuity that has a guaranteed lifetime withdrawal benefit, Abkemeier said.
Also, when clients come asking, “Should I take the lump sum or the in-plan annuity?” the advisor can help the person sort out the details.
If a client decides the lump sum option is better, the agent or advisor could then explore various options, including the retail annuity option when appropriate.
The likelihood of encountering clients who want to take the lump sum is not insignificant. More than half (54 percent) of plan sponsors that offer DB or hybrid plans allow full lump sum distributions, and 25 percent of DB plans allow partial lump sum distributions, according to the “Retirement Income Practices Study,” a June 2012 report from MetLife.
What’s more, 65 percent of participants in plans offering full lump sums do take the full option, and 13 percent of participants in plans offering a partial lump sum option do take the partial option, according to the MetLife study.
The thing to keep in mind is that the person who is making the choice “will be in a better position if he or she knows how much income they will get,” Abkemeier stressed.
In discussing this with clients, agents and advisors will need to stay alert to the psychological effect of seeing that big amount of money in the lump sum offer. “Some people want to get their hands on it right away,” Abkemeier said. The concern is that they may take the option without understanding the impact of the decision on their retirement future.
His suggestion is for the advisor to help the person see that impact. “For instance, say to the client that, ‘You have X dollars in your plan. It will provide you with a monthly income of Y dollars. But if you take the lump sum option and annuitize it outside the plan, you will get Z dollars. Let’s see which is more attractive and which is best.’ ”
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