Help participants understand income options

Dimensional Fund Advisors presents three professionals who discuss distribution options and how to help participants understand retirement income solutions.

Participant distribution options

Upon retirement, participants commonly have three distribution options: lump-sum payment (e.g., cash out or rollover), installment payment (e.g., systematic withdrawal from the retirement account), or annuity (e.g., guaranteed income stream). Participants who like their current plan and are comfortable with the plan's limitations and provisions may want to keep assets there and set up a systematic withdrawal. A lump-sum rollover to an IRA may provide more investment options. IRAs come with unique fees and surrender charges. A lump-sum cash-out may incur taxes and penalties, and the participant foregoes future potential growth.

The lump-sum distribution is the most common option. It’s often the default, and it’s the easiest choice for participants to understand. But it may not best meet their needs.

The lifetime income paradox

A recent study from the Insured Retirement Institute showed that even though 70% of baby boomers say it’s important for retirement income to be guaranteed for life, only 3% used their account balances to purchase a lifetime income annuity in 2018.1 Why aren’t participants taking advantage of guaranteed income options, if they’re so important to them?

Participant perceptions of annuities

Many participants hear “annuity” and think “high fees.” They may think an annuity will cost their entire savings. It’s also natural for people to shy away from things they don’t understand. And, let’s face it, annuities charge fees and can be complicated. Participants may not be aware that low-cost lifetime income annuities exist and that they can buy an annuity with only part of their savings.

Overcome negative connotations

Let’s redefine the conversation and present these options as low-cost lifetime income—which can be a supplement to other income sources. Help participants understand that income annuities are flexible and that they aren’t an all-or-nothing proposition. Encourage participants to shift their thinking from wealth, or the amount of their entire savings, to monthly income, or how much income their savings can generate each month over time.

Help change the mindset around lifetime income options. Participants want guaranteed retirement income. Lifetime income annuities—whether in‑plan or out‑of‑plan—can be a viable solution.

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The Distribution Decision

Professionals discuss why participants shy away from annuitization, even though they want guaranteed income—and what you can do about it.

See what they say (PDF)