This paper focuses on structural and active guidance in the annuity consideration and

Transcription

1 The Role of Guidance in the Annuity Decision-making Process By Kelli Hueler and Anna Rappaport, FSA, MAAA Abstract. This paper focuses on structural and active guidance in the annuity consideration and purchase process and how such guidance encourages or discourages purchasing. It offers a big picture look focusing on policy, the role of the employer and service partners, and provides an analysis of experience with a purchasing platform focusing on the impact of structural and active guidance in purchasing. The analysis draws heavily on Hueler Companies data and experience in providing individuals access to lifetime income annuities through an on-line institutional purchasing platform implemented in non-exclusive partnerships with financial services firms, defined contribution (DC) plan sponsors, plan administrators, not-for-profit associations, and financial advisors. Key Words. Annuity, annuitization, distribution period, guidance, structural guidance, active guidance, income in retirement, institutional market, institutional purchasing platform, retail market.

2 Lifetime income is an important part of retirement security. Lifetime income can be secured by annuities purchased in the open market, or through the architecture of various retirement programs. In the United States, when retirees have a choice of whether to take a lump sum at retirement, most take it. Contrary to popular opinion, this does not tell the story about how and whether resources are ultimately used to purchase annuity income in retirement. Data shows that individuals commonly annuitize after retiring and making the rollover decision. Developing and implementing an income plan after retiring and in steps is a very logical approach. The decisions that people make about how to use resources in retirement and whether or not to choose lifetime income may be some of the most important in their lives. They involve complex trade-offs that are often not well understood. Guidance at the time of considering options is key to ultimate retirement security. Guidance can be provided in the choice to annuitize through multiple sources, but has traditionally been delivered to individuals at the time of retirement. While the major focus of such guidance is directed at the point in time when decisions are made about managing assets during the distribution phase, expectations are built throughout the working career. This paper reviews the role of public policy, plan sponsors, plan administrators, and advice providers. It looks at how they are connected to an institutional purchasing platform that offers structural and active guidance in the purchasing process. Structural guidance includes the system for informing individuals about available options, the design of websites for presenting information and education, and enabling purchasing through a competitive bidding process. Active guidance includes the additional guidance provided by salaried professionals who answer questions and have conversations with individuals about the annuity purchase process. This paper describes the institutional purchasing platform, how guidance is incorporated, what information is provided to

3 buyers, who buys through the platform, what and when they buy, and how the purchasing process works. Data on the institutional purchasing and guidance model is based on internal analysis of data samples of Hueler Companies user profiles and corresponding purchase records. This paper is based primarily on the United States. There are no mandates to offer annuities in defined contribution (DC) plans (except for money purchase pension plans), and most annuities are purchased in the private market. Individuals have a base level of inflation indexed guaranteed life income from social security. Insurance carriers offering annuities are regulated by state insurance departments. Annuities are sold directly to individuals and on a group basis. In the individual market, agents are the main method of contact with customers. The institutional purchasing platform discussed in the paper brings the benefits of group purchase to individuals. Lessons from Chile and the United Kingdom are discussed in separate sections. Guidance can serve as an enabler or a barrier to lifetime income purchasing. Where retirement funds are managed to provide longer-term income, the most common method of management is a structured withdrawal from an investment portfolio, with no lifetime guarantees. A very common method of withdrawal uses the 4 percent rule, which provides for a withdrawal of 4 percent of the initial balance, with the withdrawal amount increased by inflation each year. Both advisors and advice providers 1, particularly those who provide managed accounts, often use a structured withdrawal approach rather than life annuities. Both the investment and mortality risk remain with the individual until specific action is taken to obtain lifetime income, and that is normally discouraged by advice professionals at least until later in life. How public policy sets the stage.

4 Public policy in the United States has been mixed; it has promoted and mandated annuitization in some settings and discouraged it in others. Social security benefits are paid only as lifetime income, and lifetime income is the mandated default in private sector defined benefit (DB) plans and in most public sector DB plans. For many years, DC plans were most often supplemental 2. Public policy has not promoted annuitization of qualified funds in individual retirement accounts (IRAs) 3 and DC plans other than money purchase plans. While life income is the legally required default method of payment in DB plans and in money purchase pension plans, there is no requirement for providing a life income option or encouraging it in most DC plans (Rappaport 2011). There is also no requirement to provide individuals information on payout strategies or options beyond what is provided in the plan, and no requirement to provide information about the possibility of lifetime income during the period when plan assets are being accumulated. There have been legislative proposals to include illustrations of lifetime income as well as account balances as assets are accumulating (United States Senate 2011). By allowing continued tax deferral and setting up the Required Minimum Distribution system (RMD), for people with larger assets, the Internal Revenue Code has established a default that is commonly used. 4 Setting withdrawals from tax deferred accounts at the RMD maximizes the amount of investment that remains tax deferred. The RMD is tax policy designed to require withdrawals from qualified funds starting at age 70.5 defining what is allowed to be kept on a tax deferred basis. Withdrawal of the RMD each year allows for continued growth in funds when investment returns are high and too rapid depletion of assets when they are low. The RMD provides for gradual withdrawals from IRAs and takes the focus away from annuitization and other income options for those people who do not need to withdraw more from their

5 qualified funds. It is easily viewed as a government recommendation with regard to how to withdraw funds and a form of guidance from public policy (Rappaport 2011). Plan sponsors also have not been encouraged to offer annuity options where they are not required. Regulations have imposed barriers and created legal risks. Proposed regulations and two revenue rulings issued February 2, 2012 by United States Treasury Department seek to remove some of the barriers and make it easier to offer lifetime income options to participants in certain instances. The themes for the new proposals include (1) moving away from the idea that distribution option choice in employer-sponsored DB and DC plans is all or nothing, and making it clear that split elections are fine, (2) removing the barriers to the use of advanced life deferred annuities that arise from the structure of the RMD requirements 5, (3) clarifying that it is permitted for DC sponsors who also have DB plans to allow participants access to lifetime income through rollover of DC funds into DB plans 6, and (4) making it easier for DC plan sponsors to include deferred annuity options as a plan investment before retirement (United States Department of the Treasury 2012). These steps are also accompanied by new Department of Labor regulations that require the disclosure and explanation of all fees in DC plan. These steps are very significant in signaling to plan sponsors and the public the importance of lifetime income and transparency (Council of Economic Advisors 2012). They represent new general support for lifetime income creation using qualified retirement plan savings. Another area of public policy needs to be considered as well. Employer-sponsored retirement programs are regulated by the Federal government, but insurance contracts are regulated by state insurance departments. The sales process is regulated including a requirement for a suitability review when individual annuity contracts are sold. The standards are evolving. The National Association of Insurance Commissioners updated its model standard in 2010 when

6 it adopted the 2010 Suitability in Annuity Transactions model regulation. The regulation was adopted to establish a regulatory framework that holds insurers responsible for ensuring that annuity transactions are suitable, requires training of agents, and where feasible, coordinate standards with the Financial Industry Regulatory Authority (FINRA) requirements (NAIC 2010). The suitability review and the discussion that takes place around this review can be viewed as a form of guidance. How guidance impacts the annuitization decision. Retirement plan participants can get guidance and signals about strategies for using their funds in retirement from their benefit plan architecture and communications, from general information provided by the plan sponsor, from an advisor, from a third party such as a financial services firm, from the press and public information, from the guidance process established for investigating an annuity purchase, and from government through public policy. It should be remembered that guidance can support or discourage annuitization. In some cases, guidance is a barrier to annuitization. The paper will look at examples of both. In the United States, in DB plans, annuities are required to be the default distribution option, and the plan architecture provides strong signals about the importance of lifetime income. In contrast, the most common method of distribution in DC plans is usually a lump sum, which is frequently rolled over to an IRA. About 20 percent of DC plans offer in-plan annuity options, but they are rarely utilized even when offered (Wray 2008). However, IRA balances may later be used to purchase annuities, but this is not specifically tracked. There is no information to determine how many DC account balances are ultimately converted to annuities (Wray 2008). While DC plans often contain strong signals encouraging enrollment and increases in savings through their default options, rarely is lifetime income included in a default option. A change in

7 architecture may be coming for some employers. The Treasury releases in February 2012 make it clear that DC balances may be rolled over to DB plans and that lifetime income may be provided through the DB plan. This would apply for companies that offer both DB and DC plans, and a few companies already have such provisions. A variation on this idea would be to offer the rollover, and in addition, offer participants who rollover to an IRA, the use of a favorable purchasing program for annuities. Rollover to an IRA is permitted by law whenever a lump sum of pre-tax funds is available from a qualified plan. Such a program would include the annuity options in the program design. At least one large plan is currently offering a combined program approach, giving participants both the alternative of moving DC funds to DB and/or the choice of using DC funds to go to the competitive market and choose the best customized arrangement. Structural guidance in this case would include basic education about lifetime income, communication about the specific annuity options, and the pros and cons of each option. Another example of plan architecture focusing on lifetime income is an option to buy lifetime income on a deferred basis through a special investment option. United Technologies restructured its 401(k) plan to offer lifetime income through an investment option, where plan funds are invested as people work in a fund that will provide lifetime income (Stever 2011). Marketplace implementation of this model is new, and it remains to be seen how effective it will be. To date, the role of the employer in supporting and encouraging use of lifetime income alternatives has been limited. Some plans have begun to offer education around lifetime income and access to institutionally priced annuities. As shown in Table 1, according to a Plan Sponsor Council of America survey 7, about a third of employers provide access to an employer-selected

8 financial planner or offer a seminar regarding retirement assets and income planning (Wray 2008). Insert Table 1 here. However, it is not known how much information about annuities is included in the seminars or through the planners, or what messages are provided that favor or discourage consideration of annuitization. The choice of options to be presented and how they are positioned may be impacted by the products and services offered by the firm and also may be impacted by its compensation model. Of the survey respondents, 5 percent actively encourage retiring participants to leave their accumulation in the plan, 11 percent require or encourage withdrawal and the remaining 84 percent were ambivalent (Wray 2008). Some employers who do not offer access to annuities directly through the plan offer access to institutionally priced annuities through a purchasing platform such as Income Solutions. This platform is most often utilized as an IRA rollover alternative. Structural guidance used by such employers varies widely in that some regularly mention the availability of the annuity purchasing option, but others provide little to no information about the program. Additionally, some employers make the program visibly prominent at the benefits portal and facilitate easy access while other programs are buried within the benefits website and difficult to locate or access. An employer representative, in-house or at the recordkeeper, providing information at the time of distribution is the first point of contact. The structure of the information provided has a significant effect on the alternatives explored. Employers differ in whether they provide educational information, if information on annuities is included, and how they message about annuitization. The minority provide education that focuses on the importance of lifetime income and the value of annuitization, in order to encourage retirees to investigate

9 annuities, all of which has an impact. The data reveals that if, over time a plan sponsor periodically explains the benefits of the program in a newsletter or employee publication, an increase in annuity quotations, inquiries, and ultimately purchase activity follows. It appears that this type of approach can take several years to take hold but can produce increased activity with time. However, the primary author notes that it is the experience across multiple program partners that even when a plan sponsor encourages consideration of annuities, it is ultimately the organization that is the primary point of contact that has the most influence on purchasing behavior. If the organization that is responsible for the conversation where retirement distribution options are explained isn t knowledgeable about the program, or dissuades the participant from either utilizing the competitive platform or annuitizing a portion of their balance, purchase activity is similar to a plan population where the sponsors communicates little to nothing about the program or whose access is buried within the benefits portal. Hence the data suggests that communication directly with the participant is a highly influential form of active guidance that trumps basic communication and structural guidance from the employer. An increasing number of employers provide advice as part of their DC plans through the use of an advice provider. A recent survey of plan sponsors indicated that 79 percent of respondents provided some type of investment advice to plan participants (Callan Investment Institute 2012). The advice provider may be an independent third party or may be affiliated with the plan administrator. The primary goals of such advice are generally to help employees make investment decisions and to encourage more savings throughout their careers, both very important goals. Plans vary with regard to whether they encourage or permit leaving funds in the plan post-retirement, or what options they offer. Such advice providers vary with regard to whether they provide information and advice for the payout period, what advice they provide,

10 and how they help people transition to the payout period. It is the observation of the principal author based on experience with a number of programs administered by a variety of plan sponsors and administrators that some advice providers discuss a menu of post-retirement options including annuitization and provide a good explanation of the options, whereas others focus on continued investment of the funds in a managed account together with a structured payout from the funds. Further research and analysis of the information given by advice providers and its implication for distribution choices is needed. However, it is the preliminary observation of the principal author that the options presented, method of presentation, and conversations that take place at time of retirement and for several years afterward have a major impact on the choices made with regard to an individuals retirement savings distribution strategy, particularly as to whether an individual will choose to annuitize a portion of their savings or not. Employers also build expectations about the importance or lack of importance of retirement income by the way account values are shown on benefit statements during working years. Some statements show only accumulated account balances, whereas others include a retirement income projection 8. The estimate may be based on a lifetime income or other method of payout. A recent survey indicated that 58 percent of employers offer or provide a retirement income projection for participants. Of the 58 percent who provide access to a projection in one or more ways, 31 percent provide it on employee statements, 13 percent provide the information through a separate mailed statement, 74 percent provide access to a calculation through the benefits website, and 15 percent provide the projection through a third party advice provider (Callan Investment Institute 2012). Further research is needed to better understand the range of

11 practice in such statements and projections and the impact on later decisions about lifetime income and structured payouts. How institutional purchasing platform works and how guidance is incorporated. The institutional purchasing program is an Internet-based competitive bidding platform for immediate income and deferred income annuities. The institutional platform has two primary modes for implementation by a plan sponsor or program administrator, either as a distribution option within the plan or as an IRA rollover alternative. The most common method is for the institutional program to be offered as an IRA rollover alternative, with over 90 percent of programs implemented as such. Within the various program partner offerings, the individual purchaser may learn about annuities through general financial education, basic annuity education provided at the site, employer-provided information about the program (or options in general), or through a facilitator or advisor. The platform relies on participating insurance companies willingness to offer annuities through a low-cost competitive distribution channel. The system architecture and platform design offers structural on-line guidance and information to support a self service model, including general annuity education, educational videos from Zvi Bodie and Dallas Salisbury 9 discussing the importance of inflation adjusted annuitization, tools for calculating the gap between other sources of income and regular expenditures to establish income level needed, standardized competitive annuity quotes across multiple issuers, and information about the financial status of the participating insurance companies. The structural guidance incorporated in the platform does not provide recommendations about whether to buy an annuity or how much to buy. The program is designed to educate individuals about annuity options, lower costs, standardize fees, create transparency,

12 and produce the best possible market result for each individual. There is no incentive to use one annuity provider vs. another or to constrain individual purchase decisions. Access to program and guidance models. Access to the platform is largely through a retirement plan sponsor, a program partner such as a financial services firm, a recordkeeper, an association, or through an advisor who has linked to the program. The program partner plays a critical role in setting the stage for consideration of lifetime income alternatives or in effectively closing out consideration of such options. Program partners are highly influential in what options for retirement resource management are on the table and how the options are framed. The programs that present a menu of alternatives and integrate annuitization into the discussion with individuals not just at retirement but post retirement show the highest level of annuity purchase activity. Programs that show little activity through the platform, either securing quotes or annuity purchase, often have active guidance that dissuades consideration of an annuity or they position the decision to purchase an annuity as an alternative to rollover that must be chosen at a single point in time. Certain very low activity programs present onerous disclaimers prior to individuals entering the program creating the highest user drop-off rate. The platform also includes access to active personal guidance. The active guidance ranges from basic assistance to advice depending on the program partner. Most programs do not offer comprehensive financial planning or advice. Active guidance is delivered through licensed salaried professionals who are able to talk with individuals about the options accessible through their employer and/or additional lifetime income alternatives available to them through their personal IRA. Table 2 shows how the delivery of guidance differs across the program models.

13 Insert Table 2 here Three models of guidance are offered: On-line direct to individual. Access is by the individual who initiates the quote and purchase process through an on-line platform. The on-line platform includes structural guidance including general information about immediate annuities, explanation of the benefits of institutional purchasing, a calculator to help the individual estimate the gap between existing income and expenses, and a place for requesting annuity quotes on line. The individual is able to telephone the help center with questions and can be provided basic assistance. Callers are provided with active guidance in the form of assistance to help them use the on-line platform and answers to questions regarding annuity terminology, features, and the purchase process. Facilitated. In addition to the on-line only model, active guidance is offered through some partnerships that provide access and professional assistance through a facilitator: salaried licensed professionals who offer help in submitting requests for quotations, considering the purchase, answering questions, and submitting the purchase request through the platform. In some transactions, the facilitator does all of these steps, and in others the individual may secure quotes or place the transaction, while the facilitator provides part of the assistance available. The facilitator can communicate with individual buyers by telephone or . The system has an interactive design so that facilitators and individuals can both review annuity quotes at the same time. The facilitator would normally not provide broader financial advice, but may initiate the conversation. The individual could also initiate the conversation, or another person employed by the program partner could raise the topic and make a referral or the program partner could raise the topic of annuitization through its communication program. Whether referrals are used

14 depends on how the program partner has integrated the platform into the participant experience. The facilitator is typically an employee of the program partner and generally specialized in annuities and income alternatives for retirement. Advisor. The advisor provides more active guidance. The advisor generally would provide broader financial advice including advice about the individual s total portfolio, and would initiate the discussion. The advisors using the program are normally fee-based advisors paid by the client. Either party could initiate the conversation, and then the advisor would secure quotations, explain the options to the client, and make the annuity placements. To date, relatively few advisors have chosen this route. A recent study of financial planners indicated that 75 percent of planners always or frequently advocate systematic withdrawals for income generation, 38 percent always or frequently advocate the time-segmentation approach, and 33 percent of planners always or frequently advocate the essential vs. discretionary approach (Guyton 2011). Purchase of immediate annuities is included in the essential vs. discretionary approach. Table 3 compares the guidance models with individual purchase and DB plan elections. Insert Table 3 here. DB plan elections have a fixed period when the election is required. All of the other purchase models allow flexibility with regard to when the annuity purchase can take place and the features that can be selected. The models differ with regard to how the contact is initiated, the options available, the timing, and the type of guidance that is offered. The three models in the institutional purchase platform are similar except for the content and method of active guidance and the method of initiation of the discussion. Table 4 provides insights as to how the annuity purchases differ depending on the delivery channel used. Insert Table 4 here.

15 It should be noted that the groups purchasing through different channels are not matched demographically or by wealth levels. The causes for the differences by channel have not been determined. Individuals purchasing directly through the on-line platform have the highest average premium, are heavily male, and are the most likely to select a joint life annuity. They are likely to consider the purchase for quite a while and get multiple quotes. Those purchasing through facilitators are likely to have several conversations before quotations are secured, suggesting consideration of needs prior to obtaining quotes. An analysis of a recent random sample of purchases where active guidance is available showed an average of 5 calls per purchaser and a maximum of 14. Those purchasing through advisors have the lowest premium per single purchase and a greater number of individual purchases, which may reflect the positioning of the annuity in their portfolio. The advisors and their clients are more likely to view the purchase as part of a longer-term lifetime income planning process. The facilitators role differs as they are acting as specialists dealing with the client specifically on the annuity decision, while the advisors are generally assisting their clients with design and implementation of a broader financial plan. Structural Guidance and decision making. The individual purchaser makes decisions about when to buy, how much to buy, whether to make multiple purchases, which carrier(s) to choose, and what form of annuity to take. The competitive quote includes multiple carriers, the form of annuity requested and alternatives, and the financial rating information of the insurance carriers. Nearly all purchasers choose to get multiple quotes before completing a purchase, and some get many. Four is a typical number of quotes for people who make one purchase, and 10 is a typical number for people who make multiple purchases. Some of the variations that can be tested using multiple quotes include single vs. joint life, joint life switching who is primary, joint life with

16 different percentages to the survivor, premium amount, and the date when annuity income will commence. Pricing is real time. The competitive quote is designed to be transparent, and include comparable product features from different carriers and parallel information, offering a form of structural guidance. By including not only the income that can be provided, but also the financial rating of the carriers, it points out the importance of the financial status of the insurance company. Suitability reviews and their link to guidance. As part of the purchase of an immediate annuity contract, the purchaser must complete a suitability form. While the specific forms may differ by insurer, data required includes information to determine suitability. According to the NAIC: Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including age, annual income, financial situation and needs, financial experience and objectives, intended use of the annuity, financial time horizon, existing assets, liquidity needs and net worth, risk tolerance and tax status (NAIC 2010). Each insurer has forms and specific definitions of financial information to be reported. While this process is designed as a form of consumer protection, it can be viewed as guidance as well. The institutional purchasing platform includes suitability review as part of the purchase process. As part of the review, a checklist is used. Examples of flags that signal further review, and in some cases, a confirmation contact with the applicant for the annuity include; relatively large annuity purchase compared to assets, single life annuity without refund or a certain period, purchaser over age 80, or under age 59.5, and insufficient financial information on the suitability form. The reviewer looks at the financial situation, reasons for purchase, and when required, there is follow-up contact. Here is an example for a response to a review question from a facilitator: The buyer has confirmed that he has sufficient funds to cover basic and emergency and expenses and

17 that he is not using more than 50 percent of his stated net worth to purchase the annuity. Examples of review questions are that life-only buyers are asked to confirm that they understand that there is no benefit beyond their lifetime, and those who buy period certain annuities are asked to confirm that there is no benefit beyond the certain period. The suitability review process serves to confirm that the buyer understands their purchase decision and that the sale is appropriate. An interview with a reviewer indicates that buyers rarely change their minds as part of the suitability process. Experience with the guidance models. Experience has shown that the conversation is a very important element in the purchase process, and increases purchase activity. The facilitators are salaried employees of program partners. Hueler also has licensed employees who are able to answer questions for the purchasers, the partner employees, or advisors. Advisors are financial planners who use the service on behalf of their clients. In some situations the facilitators initiate the process of securing a bid and making the purchase, and in others they simply answer questions. Experience has shown that the vast majority of purchases occur after a conversation. Seventy-two percent of the purchases in a recent analysis were through facilitators and advisors, where multiple conversations typically take place. The remaining 28 percent purchased independently on-line, but some of them also ask questions after contacting program partner s help center. Very few people will make a purchase without a conversation. Based on the data we can estimate that this group is fewer than 10 percent of purchasers. Many people get multiple bids over time. While purchases can occur immediately, timing varies, and in a few cases, it takes more than two years from first contact to purchase. Some individuals make multiple purchases over time. Traditionally the decision about whether to purchase lifetime income annuities has been incorporated as part of the paperwork process that takes place at the point and

18 time employees retire and is presented as an all or nothing either or decision. This model does not fit the preferred method of individual decision making. The data shows that the decision to purchase an annuity typically occurs after an individual has retired. Analysis of the data reveals that 70 percent of the purchases were made by individuals who identify themselves as retired. The purchase process often takes place over a longer time period, sometimes in steps and it appears to work much better when an individual s access to the option is supported by a conversation (or multiple conversations). While the usual focus is on decisions at retirement, rollovers into IRAs can be annuitized later, but this is not tracked on a system-wide basis (Wray 2008). Retirement is a time of transition and adjustment, so it makes sense to annuitize later for multiple reasons. It takes some time for individuals to see how much they are spending and how much more regular income they need. Some people try to work part-time as part of retirement, and it takes time to see how that they affect their needs. Others are making changes in living arrangements or housing. Others are getting comfortable managing finances without a regular paycheck and without the employee benefit plans they were accustomed to. It also makes sense to phase purchases over time in order to diversify interest rate risk. At present, an immediate annuity purchase is an irrevocable decision often offered as an all or nothing option that is likely to be rejected. The institutional choice platform is an example of one alternative for moving away from what has proven to be an unsuccessful delivery model. Trial annuitization is another example of an alternative model designed to address some of these inherent drawbacks. Advocates for increasing utilization of lifetime income alternatives have proposed the concept of trial annuitization, where assets would be annuitized for an initial period and the individual would have a choice after a defined period of moving to a lifetime annuity, or

19 using another option including receiving a lump sum. The specific proposal used a 24 month period and made the trial annuity a default (Iwry 2009). Who is buying immediate annuities. An analysis of purchases drawn from the Hueler database indicates that about two thirds of the buyers are men. The most common age for purchase is in the 60s with 56 percent of purchasers in their 60s but purchasers are as young as age 50 and as old as age 85. Thirty-two percent are at ages 70 or over, including 8 percent at ages 80 and above. Of those single premium annuity purchasers indicating net worth on the coded sample of suitability forms, 7 percent indicated net worth of less than $100,000, 27 percent indicated net worth of $500,000 to $1,000,000, 21 percent indicated net worth of $1,000,000 to $2,000,000, and 14 percent indicated net worth of more than $2,000,000. The suitability forms are required by the insurers as part of the annuity application. Specific questions about a person s financial profile may vary but they do not include home equity. While wealth data is generally required, it is self reported. Sixty-eight percent of the purchases are from qualified 10 funds, either an IRA or a DC plan, 28 percent are from non-qualified funds, and 4 percent are exchanges under Section 1035 of the Internal Revenue Code. 11 Exchanges are existing annuity contracts, often variable annuities, that are exchanged for immediate annuities purchased through this platform. Some purchasers use a combination of qualified and non-qualified funds to purchase multiple annuities. What are they buying. Table 5 provides an analysis of purchases. Structural guidance included in the system provides that in addition to the requested quote, at least one alternative quote is presented. The largest number, 50 percent, of immediate annuity buyers are purchasing single life annuities, with 37 percent buying joint life annuities, and 13 percent buying period certain annuities.

20 Increases to protect against inflation, either CPI increases or annual percentage increases are purchased with 14 percent of the immediate annuities. Males and females are selecting different types of annuities. Eighty-one percent of the joint life annuities are purchased by males, compared to only 50 percent of the single life annuities. It is likely that in married couples, the husband would be designated as the purchaser more often than the wife. Insert Table 5 here While the average amount of income purchased is over $850 per month, more purchases are for smaller amounts. Eleven percent purchased under $200 per month, 18 percent purchased between $200 and $399 per month, and 22 percent between $400 and $599. Fifty percent purchased less than $600 per month, 22 percent between $600 and $999, and 28 percent over $1,000 per month. Females purchased lower amounts. The average purchase amount was $156,000 for males and $110,000 for females. While the vast majority of buyers make a single purchase at a time, there are a number of purchasers who make multiple purchases, and whose purchases illustrate sophisticated thinking in the purchase decision. The purchase data shown throughout the paper is based on single purchases, and multiple purchases are not aggregated. Case studies. Case studies and analysis of purchases are used to understand what happens in the purchase process. Several case studies based on actual experience with the institutional platform provide examples of multiple purchase scenarios and more sophisticated or timed purchasing strategies. Buyer A is an example of a sophisticated purchasing strategy. The transactions were executed by the advisor and the quotes secured by the advisor. Buyer A was a female working with a financial advisor and she bought 12 separate annuity contracts, four each year at a single point in time for three consecutive years. Multiple carriers were used, diversifying carrier risk. These

21 were single life annuities, with inflation indexing in most and some variation in the features. Funds were withdrawn from an IRA and the amount of the premium paid for each purchase ($10,000) was the same. Purchase over time diversifies interest rate risk and allows the buyer to get accustomed to the annuity. The buyer was 66 in the first year and the additional income purchased was a total of $575 per month. Twenty-two competitive price quotes were secured during the process. Buyer B is another example of a sophisticated purchasing strategy. Purchaser B bought from three different insurance carriers at one point in time, with a premium of $50,000 per carrier for a purchase of $904 of monthly income. All purchases were from qualified plan funds from a DC plan with the same plan design for each: joint life with 50 percent benefit to the survivor and a 10 year certain benefit. The buyer was a male age 62 and the joint annuitant a female age 59. Four quotes were requested within a six month period from the date of first quote to the purchase date. Buyer C, a couple, bought five annuity contracts using multiple carriers, using a mix of qualified and non-qualified funds, a mix of single life and joint-life with a cash refund. There was less than three weeks from initial quote to time of purchase and 51 quotes were secured. This enabled review of many different annuity feature combinations. Buyer D bought two contracts about five months apart. The first purchase was made with the help of a facilitator who requested the quote and executed the purchase. The second was made by the individual. Two different insurance carriers were used, and the first purchase was for a joint annuity with 100 percent to the survivor and a term certain and the second for a single life with term certain. Four quotes were secured and the first purchase was made the same week as the first quote. The premium was $250,000 for the first purchase and $175,000 for the second. The

22 purchaser was age 85 with a 67 year old joint annuitant. The income purchased was $1,481 per month in the first purchase and $1,516 in the second. Buyer E bought a five year term certain annuity. Over 4 percent of the purchases are for five year term certain annuities. This purchase was by a 61 year old male using $70,000 of qualified plan funds to purchase $1,200 of monthly income. Nine quotes were obtained and it was four months from the first quote to the purchase. Possible reasons for the purchase of a five year term certain annuity include a bridge to social security, planning to collect social security later, financing college expenses, or providing more income to pay off a mortgage. These are just examples. Buyer F is an 84 year old female who used $150,000 to purchase $1,653 of monthly lifetime income using non-qualified funds. No refund features were purchased. A facilitator aided in the purchase. Eight quotations were secured, and it was 5 weeks from the first quotation to the purchase. Purchases by annuitants in their 80s are typically supported by facilitators, are often on a non-qualified basis, and receive additional scrutiny relative to suitability. Buyer G is a male age 65 and female age 64. They made four purchases using four insurance carriers. There was a three week period from first quote to final purchase and 30 quotes were secured. There were different combinations of annuity features requested including a mix of joint life with 100 percent survivor income and single life income. Certain periods of 15 to 20 years were included. Purchases were made by the individual from qualified plan funds, and a facilitator secured the quotes. Total purchase price was more than $500,000 and less than one-third of total liquid net worth. This is an example where the individual clearly took steps to diversify carrier risk. Buyer H is an example of a couple where the wife is much younger. They made purchases a year apart and bought six contracts, with a premium of $35,000 per contract. They chose a joint and

23 100 percent survivor benefit with inflation indexing. The husband was age 66 at the time of the first purchase, and the wife was age 46. IRA funds were used, and there was two weeks between the time of the first quote and the first purchase. A total of 9 quotes were secured and there was an advisor involved. Timeline from quotes to purchase. The DB plan election must be made within a specified time window and the price of the various options is a part of the DB plan design. As illustrated by the case studies, the annuity purchase process is very different when the individual utilizes the institutional platform. The purchase decision may be made over a long period of time and the buyer can choose when to purchase, and can select from a range of annuity alternatives. Individuals choose to purchase annuities with different features and monthly income benefits, and it varies by individual as to whether they buy once or in several pieces over time. As indicated in the case studies, some buyers have bought multiple contracts and some bought at different times. Reasons for buying at different times would include diversification of interest rate risk, availability of cash to complete purchase, changing financial circumstances that require additional income, and buying more monthly income later after getting comfortable with the idea of an annuity. Reasons for buying multiple contracts also include diversification of insurance companies. Buying an annuity through a flexible platform with the ability to customize features is entirely different from making a DB plan election. Based on experience to date, there is a distribution of time from initial quote to purchase and many buyers secure repeated quotes. Sixty percent of purchases are completed within two weeks of the initial quotation, 78 percent within four weeks, and 94 percent within 6 months. Conversations about the concept may occur before the first quote. Quotes change daily and various combinations of annuity features are available. There has been a period as long as over two years from initial quote to purchase.

24 Competition, issuer selection, and fee disclosure as part of an institutional framework Competitive bidding is used for all annuity quotations. More than a decade of experience reviewing quote data and repeated analysis shows that at any point in time different individual issuers are competitive for different quotation scenarios, and quote results change over time. The differential between results for individual quotation scenarios may be due to insurance carrier views of specific annuity features, demographics, underlying pricing assumptions, market conditions, and timing. An analysis of several thousand annuity quotes showed that on average the difference in monthly income between the high and low quote is 8 percent, and in some instances, it may be as much as 20 percent. Spreads greater than 15 percent are rare. The analysis also showed an issuer s position for annuity quotes relative to peer companies varies over time. To graphically illustrate how an issuer s position changes over time, Figure 1 shows a sample of 50 individual quotations, each with a $100,000 annuity purchase price, was pulled from the larger analysis, and one specific insurance carrier s quote position was plotted against multiple peer companies across different annuity types over a 12 month period. Insert Figure 1 here Each vertical line in the figure represents the range of the high to low annuity quotes across multiple insurance providers for each annuity quotation scenario. The box represents the same individual insurance carrier across each quote scenario. Within the sample, the carrier tested had the high result for some quotes, the low result for others, and was in the middle range for those remaining. The size of the spread between the high and low quote could be significant and varied by scenario. Similar analyses in prior periods have shown the same results. To put

25 results in context, these spreads were compared with those in the United Kingdom and they are not as large as those found in the United Kingdom (Reyes 2008). Insights about questions asked and concerns. Some program partners have support staff who answer questions and assist with the purchase process. Others ask questions of Hueler Companies staff directly. Some of the most common questions are about process: how to access the live quotes and what happens during the quote/purchase process. Another common question is How much should I annuitize? Individuals who ask this question are directed to the income gap calculator at the website that helps them consider other sources of income and categories of typical expenses, and the difference between essential and discretionary expenses is also explained. Another common question is whether there are any fees involved in the program. The institutional platform embeds a flat one time transaction fee in quotes that applies to all purchases. Fees are fully disclosed to the individual before and after purchase which often generates additional questions as this differs from other annuity delivery models. Buyers also commonly ask questions about providing survivor benefits and inflation protection. Other commonly asked questions are about insurance companies and include: How many insurance companies will I be able to choose from? This number varies and can be as many as 10, depending on the annuity features requested and what program partner they are connected to. Buyers also commonly ask how insurance companies are chosen and what the differences are between companies. They are directed to the location on the website that provides information about the companies used and their financial condition including ratings from Moody s, Standard & Poors, and A.M. Best. Some annuity buyers as well as program partners are very aware of the issue of insurer insolvency, and ask about this issue. Some buyers split the purchase between multiple insurance carriers to diversify insurance carrier risk. Plan sponsors who offer access to

26 any form of annuity product or platform whether or not it includes competitive bidding are generally concerned about appropriate oversight with regard to the financial stability of any participating insurance company. Lessons and observations from Chile. Chile has a mandatory national DC pension system and participants have a choice of withdrawing funds using phased withdrawals or annuity purchase. The program in Chile was adopted in a situation where there is no ongoing traditional social security program. Funds are accumulated in private pension funds (AFPs), who are the providers of programmed withdrawals. Individuals whose accounts are less than the amount needed to provide the minimum benefit guaranteed are not allowed to purchase annuities. Overall a majority of the retirees are now choosing annuities (Ruiz 2012). To address concerns about the cost of annuities and the expenses connected to them, a government-sponsored competitive bidding system, SCOMP, was introduced in The SCOMP was designed to improve competitiveness and transparency, and to meet the needs of consumers and all of the entities participating in the pension system. The SCOMP annuity quotations can be used directly by the individual or by engaging an insurance broker. If the SCOMP enters the system through the AFT and the individual purchases the annuity directly, there is no intermediation fee, but if a broker is used, an intermediation fee of up to 2.5 percent can be charged (Reyes 2008). The system operates in the following way: 1. The member approaches the AFP or makes use of the services that the administrators offer by Internet or and initiates the procedure to retire, either by old age, early retirement or disability. The AFP sends the member s balance certificate with personal data to the SCOMP system;

27 2. The member selects participants in SCOMP to request quotes. Participants include AFPs, brokers and Life Insurance Companies; 3. The member sends a request for annuity quotes, with or without the assistance of brokers or sales agents. Members can make up to three separate requests for each certificate issued by his or her AFP; 4. The central information system validates the personal information of the member (e.g. age, sex, eligibility, balance), assigns a code, and sends the information with the request to Life Insurance Companies; 5. The Life Insurance Companies send their annuity quotes, and AFPs send information about PW payments; 6. SCOMP sends the PW and annuity quotes to the member. The quotes are valid for 15 days; 7. The member has five alternatives: to accept one of them; consult the SCOMP again; request external offers; request the holding of an auction within the System; or give up the idea of retiring or changing pension mode (Reyes 2008). This system differs from the institutional platform in that it is connected to a mandatory government DC program. Members are allowed to select either phased withdrawals or annuities, but not lump sums. They can also select which entities to get quotes from. The institutional platform is linked to a number of the entities in the pension system, but it is purely voluntary on the part of plan participants to seek quotes. Once a quote is requested, competitive information is automatically provided for all carriers participating in the program. With the institutional platform, there is a fully disclosed one time transaction fee determined by the service level and program partner, and no further intermediation fees or commissions are paid for the purchase.

28 Where an advisor is used, the onetime transaction fee is typically the lowest fee available, because the individual then pays an out of pocket fee to the advisor for their work. The advisor is hired by and represents the individual. Under the SCOMP system in Chile, although 34 percent of the participants who enter the system do so directly, only 12 percent finalize the process without commission. In addition, only a small fraction of the participants use the option to secure an auction, or competitive bid (Reyes 2008). In both Chile and with the Income Solutions platform, active guidance and support is used by the majority of the participants. Only a few participants complete the purchase entirely on their own. With the institutional platform, competitive bidding is automatic, but in Chile it is not, and its use is limited. The experience in Chile also demonstrates that incentives matter. Where brokers were involved in the process of reviewing annuities, 75 percent of the individuals got the best payout. That was only 43 percent when the retiree used his AFP for advice and 3 percent where the life insurer was consulted. The life insurer experience may reflect the fact that agents have an incentive to capture customers once contacted. The AFPs participate actively during the accumulation phase but receive no payments for giving advice about payout products (Ruiz 2012). Lessons and observations from the United Kingdom. In the United Kingdom, it was historically possible to take 25 percent of the value of accumulated pension wealth, whether from a DB or DC plan as a lump sum, and the balance had to be annuitized by age 75. Individuals had the right to shop around for an annuity through the Open Market Option (OMO) since 1978, but the majority use their pension provider to also supply their annuity, despite the fact that they often are not receiving the best annuity rate. An

29 analysis showed that the difference in income between the best OMO rate and the existing pension provider can be as much as 30 percent, but only about one in three individuals switch to a new provider (Reyes 2008). Since 2002, it has been mandated that pensioners must be informed that they have the right to secure annuities from organizations other than the current pension provider. Those with higher income are much more likely to switch. Twenty-six percent of people with monthly income from 250 to 499 went to the OMO compared to 67 percent of those with monthly incomes of more than 3800 (Reyes 2008). The United Kingdom government has been working to improve the process and is working with the Pensions Advisory Service, an independent voluntary organization that offers the Pensions Advisory Service (TPAS) on-line annuity planner. The planner assists the individual in choosing a type of annuity and in understanding prices (Reyes 2008). The Money Advice Service is a website that is organized by the government and funded by a levy on the financial services industry. The planner and various information booklets are part of the service. The planner includes issues such as single life vs. joint and survivor income, inflation protection, and death benefits. It is a form of structural guidance (Money Advice Service 2012). Observations. This section of the paper provides a synthesis of key ideas including some issues not previously discussed in the paper. Influence of program architecture. Program architecture is a major form of guidance in driving increased enrollment, increased savings, and investment choices in United States DC plans. In contrast, it is rarely used to encourage lifetime income for participants in qualified DC plans. This differs from Chile and the United Kingdom, where public policy mandates and program architecture focus much more heavily on lifetime income. However, the United States differs

30 from these countries in providing significant inflation adjusted monthly income from a social security system. Policymakers, plan sponsors, and administrators are all considering enhancements to program architecture for the future. Importance of active guidance. Active guidance; that is, the conversation with a person who can answer questions and provide information, is a very important part of the purchasing process and increases purchase volume. Relatively few individuals are comfortable completing such an important transaction totally on-line. More than 70 percent of purchases through the institutional platform use active guidance, either with the help of a facilitator or an advisor. An additional number who use the institutional platform directly get active guidance through the help center. Importance of competitive bidding. Competitive bidding is valuable to the purchaser. When bids for different customers are compared over a period of time, the insurance carrier with the best bid changes over the time frame and between quote scenarios. The spread found in the institutional platform bids averages about eight percent and can range up to 20 percent. United Kingdom experience has shown spreads of up to 30 percent in that market (Reyes 2008). Without a process to facilitate private sector competition, individuals are likely to remain with their existing provider even if they could substantially improve their monthly income amount and ultimate income sufficiency. Signals about income over time. Options for purchasing annuities and how the purchasing process is structured are a small part of the total decision making with regard to whether to use an annuity, and at what point in the retirement transition to purchase an annuity. Signals provided throughout employment may serve to build interest in lifetime income or to create expectations that retirement resources are an investment fund to be self-managed in retirement. The conversation at retirement and information provided about future use of funds may

31 encourage or discourage consideration of lifetime income. Additional research is needed to understand how communications throughout the employee s career influence post-retirement choices. Insights into annuity purchase. The major reason for purchase of single premium immediate annuities derived from suitability data was income at retirement. Other reasons included stability and safety, tax deferral, and estate planning. Nearly all purchasers chose to request multiple quotes before completing a purchase, and some request many. Individuals are becoming more comfortable with making investment transactions on the Internet. The lifetime income product purchase is much more complex and more important, and for most people requires additional support or guidance. Annuity purchase as part of portfolio. The experience of the institutional platform is that the average premium for immediate annuities purchased is $139,000. Thirty-four percent of the purchasers use less than 10 percent of their wealth as reported on suitability forms for the purchase, and 61 percent use 25 percent or less. This is true even if an individual is using 100 percent of their employer-sponsored retirement account balance. Purchasers appear to be thinking about the purchase as part of a portfolio. The traditional positioning of the annuity option in benefit plans as an all or nothing proposition does not fit with actual (real life) purchasing behavior. It is the impression of the principal author that purchasers often have a specific objective, and that the annuity purchase is part of the implementation of an income plan. The United States Treasury is now affirming that it should not be an all or nothing choice, and they are clarifying the rules for qualified plans (United States Treasury 2012). Statistics related to the low take-up rates for annuities as a plan distribution option have often been used as an argument against annuitization and portrayed as evidence that individuals don t want to annuitize

32 a portion of their savings rather than recognizing the poor framing, constrained delivery, and lack of guidance as significant deterrents. Timing of purchase. Traditional benefit plans require elections during a fixed period at retirement. In contrast, an individual who is buying an annuity through an IRA rollover or from non-qualified funds has much more flexibility. Many purchases appear to occur after individuals retire, and after they have reviewed many quotes and several alternatives. While the largest number of people, 56 percent, buy in their 60s, 32 percent buy at age 70 or older, including 8 percent who buy at ages 80 or higher. The actual purchase data contradicts representations that interest in lifetime income annuities among retirees is mainly at higher ages. Barriers to annuitization. In thinking about guidance and annuitization, it is important to consider known barriers as well as often unrecognized barriers. Some of the barriers or discouragements are embedded in the structure of the plan, the way alternatives are framed, and/or the advice model available. Others can be found in public information. Important barriers include: 1. Annuities have gotten very bad press, often related to concern about the costs and value provided and provider risk. Immediate annuities offering lifetime income are often confused with these more complex investment focused variable annuity products. 2. Annuitization is often presented as an all or nothing decision. Total annuitization of assets is most often rejected by individuals who are retiring and could be unwise in many circumstances. Individual annuity purchase that makes up too great a percentage of an individual s retirement savings is precluded through a conservative suitability process. The communications and conversations at time of retirement must present options in the employer s plan. However, when the plan does not offer annuitization alternatives, these

33 conversations often fail to provide a full range of options along with the pros and cons. It appears very likely that some advice providers are discouraging annuitization by the way options are presented or excluded from presentation. Further investigation is needed to understand what is actually presented to retiring individuals, and how it influences choices. 3. Financial advice often comes from sources whose revenue is impacted by the choices made by individuals. In such cases, purchase of lifetime income could negatively impact ongoing revenue. Additional research is needed to understand the implications of conflicts with regard to annuitization. 4. Some employers who have a strong interest in better financial outcomes for retirees are reluctant to get involved in the post-retirement period due to concerns about fiduciary and legal liability. Influences and results vary by setting. Conversations and information about management of resources post-retirement are very different depending on the practices of the employer and plan administrator, on whether an advice provider is used, and on the advice provider s model for post-retirement. Plan sponsors and their support services range from those who take a hands off approach leaving the individuals to find information on their own to those who provide information and access to specific solutions or a range of solutions. Some support services discourage annuitization whereas others encourage consideration of annuities and provide easy access to favorable purchasing. Some plan administrators are affiliated with companies that also manufacture investment products and offer retail asset management services. Such organizations vary in how they present a menu of options to individuals. While certain firms have a comprehensive and organized

34 approach to facilitating the best outcome for the individual, others discourage low cost, less profitable alternatives shown to improve monthly income benefits. Further research is needed to determine where conflicts of interest or mixed messages impede actions that are in the best interests of participants with regard to lifetime income. United Kingdom experience indicated that about 2 in 3 individuals remain with the prior pension provider when they move to the annuitization phase although the income differential between the rate offered by the current provider and the best market rate can be as high as 30 percent (Reyes 2008). Conclusions. Many experts believe that guaranteed lifetime income is an important part of retirement security and that in the United States social security does not provide a sufficient single source of lifetime income. Where retirement systems do not directly provide such income, such as in personal savings and in most DC plans, individual choice and action are needed to increase guaranteed retirement income amounts. The institutional purchasing platform provides a marketplace example showing how transparency, competition, and guidance come together in the purchasing process. This analysis provides insights about guidance and annuity purchasing. Management of retirement resources to produce guaranteed lifetime income is a challenging process. Structural guidance is a critical component to a system that works well but it is not enough. Active guidance and a personal conversation are important ingredients and greatly enhance the chance that the individual will make a decision to annuitize a portion of their assets. Through institutional purchasing and incorporation of structural guidance, plan sponsors, administrators, advisors, and financial services organizations can bring the benefits of group pricing and an informed purchasing process to the individuals they serve. Competitive pricing consistently yields higher monthly income amounts. Many purchasers choose to secure multiple

35 quotes before making a decision. Purchasers are more comfortable and more likely to buy when they have active guidance; that is, someone who can discuss the purchase decision with them and who can help them understand the relevant issues. The conversation is very important and selection of the annuity is much more likely with this type of assistance than without it. The structural framework established by plan sponsors, administrators, and advice providers can serve to encourage or discourage consideration of annuitization. Individual advisors can also encourage or discourage the purchase of guaranteed lifetime income. Annuitization is not a good choice for everyone, but access to a fair presentation of a range of options that includes annuities for managing resources in retirement should be available to everyone, and often it is absent. Neither plan sponsors nor administrators are obligated to provide such a presentation when the options go beyond what is offered in an employee benefit plan. Most of the annuity purchase decisions are made after funds have left employer plans and they can also originate from non-qualified savings. Further work is needed to understand the choices made about managing resources in retirement, the barriers to considering guaranteed lifetime income, the influence of various parties, and what policies and programs will help individuals make the best decisions. Some of the factors that will increase the likelihood of annuity selection include: 1. A framework that includes both structural and active guidance, with the active guidance coming from a trusted source who is not seen as selling a product or having a conflict of interest. 2. Competitive pricing and disclosure of all expense charges. 3. The ability to make decisions over a period of time and to choose the option for a limited part of the portfolio, including the possibility of making staged purchases.

36 As the issues related to guidance and lifetime income are considered further, there remain a number of unanswered questions: a. What, if any, is the role of financial incentives to various parties within the system in leading individuals to decisions? b. What are the best methods of providing guidance? c. How should the buyer be informed about the complex and difficult trade-offs involved? d. Should program architecture change? How should program architecture recognize that individuals need the opportunity to update retirement spending and income decisions throughout retirement? e. What role should plan sponsors, administrators and advice providers assume in helping employees consider post-retirement options? f. What are the implications of transparency and the lack there-of? Are the right disclosures required? g. What are the barriers to individuals having access to a fair presentation of options? h. How can public policy be enhanced to encourage attractive purchase opportunities and structural guidance that matches the needs of retirees and recognizes the influential role of employers and service providers? These issues will grow in importance as longevity increases and as the percentage of income provided by DB plans continues to decline. The authors wish to thank and acknowledge the support and assistance of Kathleen Schillo from Hueler companies who managed the analysis and preparation of the data and provided many comments on the paper drafts. References.

37 Butler, Monika and S. Staubli (2012), Payouts in Switzerland: Explaining Developments in Annuitization, in O. Mitchell, J. Piggott, and N. Takayama,eds.,Securing Lifelong Retirement Income: Global Annuity Markets and Policy, Oxford, U.K.: Oxford University Press, pp Callan Investments Institute (2012), 2012 Defined Contribution Trends Survey, San Francisco, Ca Council of Economic Advisers (2012), Supporting Retirement for American Families, Washington, DC, Guyton, Jonathan, CFP (2011) Special Report: Retirement Income Planning: Study Suggests Link Between Planner Retirement Advice and Client Life Style Changes, Journal of Financial Planning, 24(12): Hueler, Kelli (2012) PSCA Adds Hueler Income Solutions As a Member Benefit, Defined Contribution Insights, 60(1):17 Iwry, J. Mark and John A. Turner (2009), Automatic Annuitization: New Behavioral Strategies for Expanding Lifetime Income in 401(k)s, Retirement Security Project, Washington, D.C., _iwry.pdf Money Advice Service (2012), Pensions and Retirement, UK, National Association of Insurance Commissioners (NAIC) (2010) Revised Suitability in Annuity Transactions Model Regulation Executive Summary, Kansas City, MO,

38 Plan Sponsor Council of America (PSCA) (2011) Hueler Income Solutions, Rappaport, Anna M. (2011) Retirement Security in the New Economy, Developing New Paradigms for the Payout Period, in Retirement Security in the New Economy: Paradigm Shifts, New Approaches and Holistic Strategies, Schaumburg, Illinois, Society of Actuaries, mrs12-rappaport-paper.pdf Reyes, Gonzalo, and Fiona Stewart (2008). Transparency and Competition in the Choice of Pension Products: The Chilean and UK Experience. Working PaperNo. 7. Paris, France: International Organization of Pension Supervisors (OIPS). Ruiz, Jose and O. Mitchell (2012), Pension Payouts in Chile: Past, Present, and Future Prospects, in O. Mitchell, J. Piggott, and N. Takayama,eds.,Securing Lifelong Retirement Income: Global Annuity Markets and Policy, Oxford, U.K.: Oxford University Press, pp Stever, Robert (2011). United Technologies DC plans to add lifetime income option, PIonline. October 3 United States Department of the Treasury (2012), Treasury Fact Sheet: Helping American Families Achieve Retirement Security by Expanding Lifetime Income Choices. Washington, DC, United States Senate (2011), Background on the Lifetime Income Disclosure Act (S.267), Washington, DC,

39 Wray, David (2008), Testimony before the ERISA Advisory Council Working Group Working Group on Spend Down of Defined Contribution Assets at Retirement, ERISA Advisory Council, Department of Labor, Washington, DC.

40

41 $750 Figure 1 Sampling of Income Solutions Quotes ($100,000 Deposit): Quote Range versus Issuer Quotes for One Year $700 Quoted Monthly Income $650 $600 $550 Source: Author's analysis of Hueler Companies data Copyright Hueler Companies Income Solutions is a registered trademark of Hueler Investment Services, Inc.

42 Table 1 Types of guidance/education provided by companies to employees. Results of 2008 survey of Profit Sharing Council of America (now Plan Sponsor Council of America) members Percentage Type of Education 11% None, except notices required by law 34% Access to an employer selected financial advisor 78% Provided educational materials explaining the options available in the plan 68% Offered retirement income calculator online 31% Offered seminar regarding retirement assets and income planning Source: Wray 2008

43 Table 2 Comparison of structural and active guidance in institutional platform delivery models through different channels Element of purchase process Institutional Individual Institutional Facilitator Institutional Advisor Structural Guidance Information provided about program availability Program partner Program partner Advisor Who secures quote Individual Facilitator or Individual Who executes purchase Individual Facilitator or Individual Advisor Advisor How platform impacts decision to annuitize Provides information about value of annuity and considerations text and video on website Facilitator may add to what is on website, but limits discussion to pros, cons and issues vs. recommendations Depends on how it is used by advisor Issues to be considered and pros/cons provided By website Additional information may be provided by facilitator; depends on program partner Depends on advisor Tools provided Yes, competitive quote, insurance company ratings, tool to calculate income gap Yes, how much additional beyond program platform depends on program partner Advisor may provide evaluation or offer tools beyond program platform Universe of insurance carriers providing annuity quotes* Platform does this automatically Platform does this automatically Platform does this automatically Can individual access website directly Yes Yes No Active Guidance

44 Who answers individual questions Help Center or Staff Facilitator Advisor Recommendations provided Source: author s analysis No No Yes *Participating insurance carriers may vary dependent upon program partner, annuity type and demographics such as state of residence.

45 Table 3 Obtaining annuity income through retail purchase, institutional purchase, and/or DB payout Characteristic Retail a Institutional Individual b Institutional Facilitator c Institutional Advisor d Annuity as a DB payout Contact re purchase of annuity Agent Self Facilitator, seen as affiliated with plan and hired by program partner Advisor, hired by buyer Plan sponsor or administrator Pricing Retail Institutional Institutional Institutional Defined in plan Competitive quotes Maybe Yes Yes Yes NA Fee disclosure Maybe Yes Yes Yes NA Fee level Retail Institutional Institutional Institutional NA Timing constraints No No No No Yes Initial communication Usually agent Plan or program partner Plan or program partner Advisor Plan sponsor Initiator of first step Usually agent Self or Help Center Staff Self or program partner Advisor Plan sponsor must follow plan

46 Table 4 Characteristics of annuity purchases and what they purchased through different channels Total Across All Channels Institutional Individual Institutional Facilitator Institutional Advisor Average Amount of Premium $139,000 $158,000 $142,000 $50,000 % Female 37% 25% 40% 49% % Male 63% 75% 60% 51% % Joint Life 37% 47% 31% 53% % Single Life 50% 40% 55% 46% % Fixed Period only 13% 13% 14% 1% % Buying within two weeks of first quote % Buying within four weeks % Buying within six months 63% 50% 70% 53% 78% 67% 83% 69% 94% 90% 98% 81% % Buying after six months 6% 10% 2% 19% Source: author s analysis of Hueler Companies data

47 Table 5 Characteristics of single premium immediate annuities purchased: amounts of income purchased and annuity features chosen Type of annuity % of total purchases Average monthly income purchased % of total purchases with inflation protection or fixed annual increases % purchased by male buyers % purchased by female buyers Joint Life With cash refund 7% $ % 78% 22% Life only 14% % 75% 25% With term certain 17% % 87% 13% Total joint life 37% 81% 19% Single Life With cash refund 9% $ % 53% 47% Life only 28% % 51% 49% With term certain 13% % 45% 55% Total single life 50% 50% 50% Fixed Period Only 13% $ % 65% 35% Total of All Contracts 100% 14% 63% 37% Source: author s analysis of Hueler companies data