I sat sown this morning to follow up with Part 2 of my mini-series addressing the fiduciary risks in purchasing DC annuities (link here to Part 1), when a Plan Sponsor magazine article caught my attention. It spoke of a study which linked the lack of pensions with the risk of poverty among women and minorities. The study, by the National Institute on Retirement Security, claims that it provides hard data on the unique impact of defined benefit type of income on older Americans’ economic well-being.
I do not know the Institute or the authors of the study, and the conclusions raise a while host of issues related to whether its the pensions or the type of employment related to the pensions. But the fundamental issue is one which served as a basis of my (now becoming) annual Mother’s Day blog, “ERISA and Mom,” . If I recall, it was studies like these which were presented to Congressional hearings leading to the passage of Retirement Equity Act of 1984. It also means that the risks may not have changed all that much over the past 25 years.
If the study holds water, it really does help answer the question of “why annuitize from a defined contribution plan?” If there is indeed a demonstrable impact of maintaining a DB type of program instead of just a DC type of program, annuitizing from a DC plan may be attractive to employers.
DC annuitization does some things a DB program cannot: it permits an employee to elect what percentage of his or her retirement benefit can be used to provide lifetime guarantees while permitting the choice between a wide variety of carriers with a wide variety of terms.
It may provide further impetus for employers who really do want a DB program but do not want to deal with the risk exposure, hassle and expense of maintaining one.