Formación de la gónada

Education, framing, and advice are options for encouraging work- ers to choose annuitization. Education involves providing information to participants. Framing relates to the way information is provided; it highlights more important information. Advice goes beyond education and framing and explicitly makes recommendations. These options all relate to the way information is presented to workers.

Participant Education

Workers may need to be educated as to the advantages of guar- anteed lifetime income provided by annuities. The Advisory Council on Employee Welfare and Pension Benefit Plans (2005a), an advisory group appointed by the Secretary of Labor, commented that plan com- munications tend to focus on the accumulation phase rather than on the payout phase. The council’s report recommended that the Department of Labor provide guidance as to what constitutes education, as opposed to advice, when employers provide information concerning benefi t op- tions. Such guidance would alleviate concerns employers have over their fiduciary liability in providing such information to their workers.

Education for workers may need to include information about mor- tality risk and life expectancy in old age. Information concerning life expectancy is the most common way that information about mortality risk is provided. However, roughly half the population at retirement will outlive its life expectancy, so information about life expectancy sets a low standard in terms of the number of years that a person should be prepared to finance. It may be more useful, as far as helping par- ticipants understand the risks they face, to provide information on the probability that they will live to age 90, and the probability that at least one member of a couple will survive to age 90.

Participant education is often provided by the institution manag- ing the investments of the participants’ accounts, which is usually a mutual fund. Those institutions have an incentive to not provide infor- mation about the advantages of annuitization. Because they typically do not provide annuities, their income will be greater if participants

continue to maintain an account balance that the mutual fund manages. Thus, policymakers may need to consider changing the incentives fac- ing mutual fund companies as pension fund providers and as providers of education to 401(k) participants. For example, mutual fund compa- nies could be paid a fee when an account holder annuitizes an account. However, unless the government provided a subsidy, this fee would ultimately be paid by the account holder, thus reducing the retirement income the account holder received.

The Pensions Advisory Service (2008), a part of the British govern- ment, provides a Web-based tool to help people understand the different options available from annuities and how those options would affect their level of benefits. This tool is designed to facilitate the choice of an annuity for people who do not have access to a fi nancial adviser.

Framing

The framing of the form of benefit receipt may be important. The concept of framing is that the way something is described is important to how it is perceived. Participants are accustomed to thinking of 401(k) plans in terms of their account balance. More participants might an- nuitize if they thought of their 401(k) plans in terms of the amount of annuitized income the account could provide. Thus, it might be desir- able for quarterly statements to provide information as to the amount of annuitized income the account would provide if it were annuitized at a different age, such as at 62, 65, or 67. Expressing the value of an annuity this way would also have the advantage of clarifying to workers the value of postponing retirement. The Social Security Administra- tion presents Social Security benefits this way on the annual individual statements it provides.

Several issues arise in attempting to accurately and clearly present the future annuitized value of a pension. The value presumably would be expressed based on the amount accumulated in the worker’s account to date. To make it easier to interpret, it should be expressed in current dollars, rather than in future dollars, which would provide a mislead- ingly large figure because of inflation illusion. Since there is always uncertainty surrounding interest rates in the future, the value would best

be presented as a range, or with some indication of the likely range of variability. Italy and the United Kingdom currently have this type of benefit reporting, where defined contribution plan participants receive an annual statement indicating the annuitized value of benefi ts accrued to date.

Advice

Increasingly, pension participants have access to computer soft- ware that provides advice concerning planning for retirement. It is rare that any of this software advises users as to the benefits of annuitizing part of their accumulated assets (Turner and Witte 2009; Turner 2010b). Even when confronted with a hypothetical case contrived to make an- nuitization a desirable option, most free retirement planning software available over the internet does not advise annuitization (Turner 2010b).

POLICY RECOMMENDATIONS

This chapter considers a number of options for encouraging annui- tization so that more participants in 401(k) plans would receive benefits as a life annuity. Based on these options, we have fi ve recommendations to make.

1) The first recommendation is to require that 401(k) plans offer annuities when those plans are provided by an employer that does not also provide a defi ned benefit plan meeting minimum standards of generosity. This requirement would treat 401(k) plans in that situation as pension plans rather than as savings plans, as they are currently treated.

2) The second recommendation is that 401(k) plans that are pri- mary or sole plans be required to offer as an option the phased purchase of annuities while working. This option would be a considerably less risky way of purchasing annuities, compared to the current method of making a single purchase at retirement. 3) The third recommendation is that spousal consent be required for workers not choosing a joint and survivor annuity as the distribution form of their 401(k) account for 401(k) plans that

are primary or sole plans. This option presumably would be of particular benefit to women.

4) The fourth recommendation would be to require that pension annuities be covered by federal annuity insurance rather than by the inadequate, underfunded patchwork of insurance pro- vided by the states.

5) Fifth, U.S. pension plan tax qualification rules make it difficult for 401(k) participants to purchase longevity insurance. The problem arises with the requirement that, to avoid tax penal- ties, minimum distributions from a 401(k) plan start by April 1 of the year following the year the person turns age 70½. This requirement prevents a person from using the entire ac- count balance, or a substantial part of it, to purchase an annuity starting at age 80 or 85. Changes in these minimum required distribution rules should be considered to encourage the private purchase of longevity insurance.