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Guaranteed Lifetime Income: Navigating the Roadblocks to a Secure Retirement��

In this edition of��Financial iQ, Dr. Qi explores the premise that low adoption of lifetime income solutions is not driven by a single factor, but rather multi-dimensional challenges that include participant and plan sponsor considerations of��complexity,��portability and leakage,��flexibility, and��fees.

According to the Employee Benefit Research Institute’s (EBRI) 34th��Annual Retirement Confidence Survey, 68% of workers and 74% of retirees are confident they will have enough money to live comfortably throughout retirement.�� Yet, this same group is most concerned about rising and persistent inflation, and those in retirement report higher-than-anticipated expenses, primarily driven by healthcare costs.��

To meet these expenses retirees must rely on Social Security, private savings, and accumulated balances in employer-sponsored retirement plans. While Social Security automatically provides monthly income streams from which to pay expenses, private savings and employer-sponsored retirement plans, specifically defined contribution plans, often do not. Generating consistent and reliable income from accumulated defined contribution balances would help provide additional long-term peace of mind for retirees to meet expenses in retirement, and this can be accomplished with the use of lifetime income solutions.��

However, according to the��, participants have low adoption rates of lifetime income solutions when they are available through their employer-sponsored retirement plans. LIMRA found that 3.65 million participants were covered under plans offering lifetime income solutions, but only 131,000 participants elected the option—an adoption rate of about 3.5%. This statistic leads us to ask:��why is the adoption rate so low when participants would benefit from utilizing those income solutions?

Roadblock 1: Complexity

For participants, the complexity of using guaranteed lifetime income arises from two key challenges:��understanding the underlying insurance product�����Ի���assessing its economic value��while navigating various uncertainties (such as life expectancy, stock market volatility, social security benefits, etc.).

For plan sponsors, while most are more prepared than participants to take advantage of the benefits of "pension-izing" retirement savings, plan sponsors face real��challenges in selecting solutions and navigating the unclear administrative responsibilities��involved.�� However, taking small steps to incorporate simple solutions like single premium immediate annuities, which provide immediate lifetime monthly income in exchange for a single, lump-sum premium at retirement, can be a great start toward introducing participants to annuity solutions while addressing the complexity challenge.

Roadblock 2: Portability and Leakage

Pre-retirement leakage is a major barrier for younger participants who are attempting to build sufficient retirement wealth, ultimately limiting their ability to leverage guaranteed lifetime income solutions for longevity protection.��Whether it's the early-career challenge of cashing-out small account balances or the difficulty of transferring insurance-backed lifetime income products when changing jobs near retirement, pre-retirement leakage due to portability remains the top threat for millions of upcoming Gen X and millennial retirees.

On the other hand, for plan sponsors, adding "auto-portability" into the auto-feature family may seem like the ultimate solution, but the path forward is complex. While Section 120 of the SECURE Act 2.0 makes auto-portability feasible, subsequent DOL regulations have added operational requirements and fiduciary responsibilities. As one legal assessment concludes, without clear regulatory guidance and the modern technology needed to streamline the transition,��

Roadblock 3: Flexibility

Although "guaranteed" income is an appealing feature for participants, many still prioritize full access to their account balance.��The idea of making a one-time, irrevocable decision to allocate a significant portion of savings into a guaranteed lifetime income product at retirement can be a major psychological hurdle.��To address this, default plan designs and comprehensive education can help participants overcome this barrier. However, the market continues to seek innovative income products, such as accumulation-based lifetime income solutions, which offer greater flexibility while preserving guaranteed benefits in the years ahead.

Roadblock 4: Fees

Both plan sponsors and participants commonly express concerns that the fees for insurance-backed income products are too high, relative to their benefits. However, these fees—often tied to insurers’ pricing assumptions, which include mortality and interest rates among other factors—are not always explicitly explained. Which raises the question: Do fees significantly impact the adoption of guaranteed lifetime income products?��

Researchers conducted experiments comparing individual preferences for lump-sum withdrawals versus lifetime income streams. The findings revealed that most participants still preferred the lump-sum option, even when the lifetime income option was actuarially fairly priced—essentially making it a “fair bet” between individuals and insurers. It further confirms that��the lifetime income option likely has a “psychological cost” for participants, rather than a nominal dollar cost.��

Given that participants often struggle to assess the economic value of a lifetime income stream,��fees and costs may be less of a deterrent than commonly believed, especially when compared to other key obstacles to adoption.

Conclusion

After considering the four major roadblocks to adopting Guaranteed Lifetime Income, it appears that��low adoption is not driven by a single factor but rather complex, multi-dimensional challenges.��Addressing these issues requires a coordinated effort from the various stakeholders throughout the retirement ecosystem—including plan sponsors, policymakers, financial institutions, and participants.��

To drive meaningful change,��the industry must go beyond product offerings and focus on promoting regulatory clarity, participant education, practical portability solutions, and greater income product flexibility.��Only through collective action can we build a more accessible and effective retirement income system.��

In the meantime, plan sponsors can start with simple solutions and build from there. Even the most basic retirement income solutions can make a substantial difference for retirees, and while participants are still in the plan, plan sponsors can focus on educating them about potential options and the benefits of financial literacy to empower them to make informed decisions.