Research Suggests 2 Keys to Solving the Annuity Puzzle

The relatively low allocation to products that provide income for life (aka annuities) among retirees has been well documented and is commonly dubbed the "annuity puzzle." Decades of research not only documents the effect (i.e., why retirees should be considering annuities more than they do today) but also offers potential explanations for why the puzzle exists.

I recently reviewed the results of a series of qualitative and quantitative interviews conducted by Prudential, as well as other supporting materials, to better understand what some of the key roadblocks around consumer decisions to purchase an annuity are today.

While there are lots of factors to consider, two resounding themes were simplicity and education, suggesting we need solutions that people can understand and information and materials that effectively demonstrate the value in relatively straightforward terms.

People Like Annuities (In Theory)

There is a relatively large body of research suggesting that consumers like the potential benefits of annuities, or products that provide protected lifetime income — at least in theory.

In the latest Protected Retirement Income and Planning (PRIP) study from the Alliance for Lifetime Income, 97% of respondents note having guaranteed lifetime income in addition to Social Security in retirement is valuable, and 93% of consumers who protected their portfolio with an annuity in 2022 are satisfied with their investment choices.

In contrast, only 83% of respondents who made other changes (e.g., shifting the portfolio into more conservative investments) in 2022 were extremely or somewhat satisfied.

People are not necessarily knowledgeable about annuities, though. In a survey conducted in April 2023 among 250 members of Prudential's branded online custom market research community of target consumers hosted by C Space, 85% said they are not confident about their knowledge of annuities. This uncertainty led to questions about how the product worked, how it benefited them, and what the costs and risks were, which are significant barriers to adoption.

Qualitative in-depth interviews among pre-retirees with savings in retirement plans echo the same desire for clarity while reviewing information on annuities, specifically a single premium immediate annuity (SPIA).

One of the things that consistently came up during the interviews — conducted in April 2023 among consumers age 50 and over with financial assets of at least $100,000 planning to retire in the next 10 years — was people feeling overwhelmed with choices.

In theory, choice can be a good thing since it provides options, but it can also lead to choice overload. In theory, a financial advisor can help here, since they can use their knowledge of the client to select the appropriate product for a client versus presenting the myriad of different options that are available.

A recent research report by LIMRA titled "Advisors and the Annuity Discussion" suggests that some financial advisors could use some help to better educate their clients. For example, the survey notes that the top two things the financial advisor could have done differently that would have resulted in the purchase of a deferred annuity were to better explain the advantages and benefits and better explain fees.

In other words, even when there is a potential fit with a product, unless retirees understand how it works, and how it is likely to benefit them, they aren't likely to buy it.

Time for a Product Pivot

Overall, what all these interviews suggest to me is that while more complicated products have the potential to help retirees, if the person doesn't know how the products work he or she is less likely to buy them.

While it's possible to overcome this lack of understanding through the use of defaults (e.g., as part of a default investment in a defined contribution plan) or by working with an advisor, I think pivoting toward products that are easier to understand is probably going to help (i.e., something other than a variable annuity with a guaranteed lifetime withdrawal benefit).

Care also needs to be taken with respect to the information created to explain the product so that it's effective but not overwhelming. I'm sure there are people out there smarter than me who are working on this, and I can't wait to see what they come up with!