As described above, Table 3.1 reports the mean of the choice of distribution options from
both the defined benefit plans and the retirement saving accounts. Twenty five percent of
respondents report that they plan to take lump sum distribution from the defined benefit plan.16 Given that a quarter of participants in the defined benefit plan are currently planning on
accepting a lump sum distribution, the distribution decision of defined benefit plans should be
considered part of the demand (or lack thereof) for annuities. In contrast, 19 percent of the
sample report that they are currently planning to annuitize some or all of their retirement saving
account balances. After attending a seminar, only 23 percent report plans to take a lump sum
distribution for their pension, while 25 percent report plans to annuitize their retirement savings
plans. In Tables 3.2 through 3.7, we explore what characteristics are associated with making
these choices and with changing plans after attending the pre-retirement planning seminar.
In Table 3.2, we present the choices reported before attending the seminar into four
categories. The first category indicates that the respondent did not have plans to take the lump
sum of the pension or the annuity of the 401(k). In other words, the respondent indicated plans
to take the defaults of both plans. Of the 1,102 respondents, 62 percent reported plans to take the
default options, indicating that the defaults are an important predictor of behavior. The next
column indicates plans to take a lump sum distribution from both plans, or not to accept an
annuity from either plan. This combination represents the choice of the non-default option for
the pension distribution and the default option for the retirement saving plan distribution.
16
This is probably an underestimate of the true demand for lump sum distributions since 29 percent of participants at BD, 18 percent of the respondents at Progress Energy, 48 percent of the respondents at North Carolina State University, 30 percent of the respondents at Williams Companies, and 9 percent of the respondents at Weyerhaeuser report that they do not know whether they are able to choose a lump
61
Nineteen percent of all respondents reported plans to choose the lump sum of both. The third
column represents respondents planning to take annuities from both their pension and their
retirement savings. This represents a choice of an annuity from the 401(k) and accepting the
default annuity from the pension. Thirteen percent of respondents reported these plans.
Finally, the fourth column indicates respondents that report plans to take the non-default
option of both plans. This is a somewhat odd combination of distributional choices, planned by
6percent of these older workers, as they report their intention to annuitize the account balance in
the 401(k) plan and to take a lump sum distribution from the defined benefit plan.17 This choice is likely part of a larger portfolio allocation choice and may represent individuals with either a
large ratio of savings in retirement savings plans versus the pension benefit amount or a large
amount of wealth overall that may be more efficient to manage outside of the company pension
scheme.
[Table 3.2]
The final two columns of Table 3.2 indicate the percentage of respondents reporting
changes after attending the pre-retirement planning seminar. Of the 822 respondents (75 percent
of the total sample) that had not been planning to take a lump sum distribution of their defined
benefit, 8 percent reported changing their planned dispositions to the lump sum option. Virtually
all of this increase in demand for lump sum distributions came from individuals that prior to the
seminar did not know the lump sum option was available to them. While this indicates a
decrease in annuitization of that form, of the 871 respondents (81 percent of the total sample)
that had not been planning to purchase an annuity from their retirement savings plans, 18 percent
changed their plans due to the retirement planning seminar. 17
The proportion of workers planning to select a lump sum distribution of their pension assets is broadly consistent the rates reported by Hurd and Panis (2006) for the respondents in the Health and Retirement Survey.
We explore these choices further first by disaggregating and exploring heterogeneity in
choices across sample characteristics. The subsequent rows of Table 3.2 report the percentages
of each group that chose each of the possible disposition combinations. Note that the
significance indicates whether the variable is a predictor of outcome. Employees at North
Carolina State University are most likely to select the default option for both the pension and
401(k) and the result is statistically significant.18 Other statistically significant results include that BD employees are more likely to select a lump sum distribution from the DB plan and are
more likely to select the non-default choices (lump sum of DB and annuitize the DC) which may
have to do with the fact that BD allows for the purchase of an annuity from within the 401(k)
plan. Employees at BD are more likely to change from the default to the lump sum option for
their DB plan after attending the seminar while employees at Progress Energy are more likely to
change to annuitizing their DC plan after the seminar.
The second grouping in Table 3.2 is by gender. Previous research has found that women
are less likely to purchase annuities, even though they have longer life expectancies. Women are
more likely to keep both plans as a default relative to men, perhaps due to lower level of
financial literacy or a lack of financial planning. Married individuals are significantly more
likely to make the non-default choices, which may be due to strategic choices of couples in
generating a diversified portfolio. Years of service can be a proxy for the size of the pension and
for the potential of the individual to have pension accounts from previous employers.
Individuals with fewer years of service are less likely to take a lump sum from their pension or to
annuitize their 401(k) savings.
18
An important reason for the greater likelihood of NC State employees accepting the annuity option from the defined benefit plan relates to the state‟s retiree health insurance plan. If retirees accept the annuity
63
Table 3.3 presents a similar breakdown of choices, now considering spousal employment
and investment information sources. Primary earners, those who have a spouse who is not
employed for pay, are less likely to select the default options and are more likely to choose a
lump sum distribution of pension benefits. Employees who look to their employee benefit office
for investment information are least likely to select a lump sum and are most likely to select the
default options. This suggests that although a lump sum payout may be a more attractive option
to the firm, the benefit office does not, in general, influence employees to select this option.
[Table 3.3]
Table 3.4 presents self-reported health and subjective survival probabilities and how
these variables affect disposition. Note that annuities may be more valuable for individuals that
have private information indicating a longer than average life expectancy. It may also be that
individuals concerned about the potential costs of a sudden health shock may want to keep some
or all assets liquid. Those individuals with medium or high expectations about their probability
of living to at least age 75 have lower probabilities of annuitizing some, or all, of their 401(k)
and accepting the default annuity option of their pension, but these results are not statistically
significant. The effect is smaller when considering the probability of surviving to age 85. It may
be that employees require survival probabilities to be far in excess of the norm for the income
stream generated by an annuity to be particularly attractive. Survival estimates of 75 or 85 years
do not seem to be enough to increase the desirability of an annuity. These results indicate that
distributional choices may be based on something besides a simple present value calculation and
an attempt to insure against longevity risks.
In Table 3.5 we explore whether disposition choices vary by wealth, savings, and
earnings levels. Those with mid-level earnings ($50,000 to $100,000) were most likely to select
the default. Those with high total wealth (above 100,000 dollars) and high DC account balances
(amounts of greater than five years salary) are much less likely to be planning to selected the
default option and are much more likely to be planning to take lump sum distribution from their
DB plan. This indicates that the wealthiest or those who have accumulated the most assets at
retirement may have the intention and ability to smooth consumption outside of these retirement
savings plans. Considering the patterns according to the amount of savings in the defined
contribution plans, we would anticipate those with small amounts in their accounts to take a
lump sum and those with large amounts to annuitize, all else equal; however, no such pattern is
observed. Interestingly, those with a large amount of equity in their home are more likely to
select a lump sum DB payment, perhaps because of plans access that equity and smooth
consumption over later life in that way.
[Table 3.5]
Table 3.6 considers whether these disposition choices are related to an overarching
investment strategy and levels of general financial literacy. Individuals are asked whether their
plans for their investment strategy in retirement are more conservative or more aggressive than
their current strategy. Typically, individuals in retirement should be more conservative with
their assets. The small proportion of individuals who reported plans to be more aggressive with
their investments in retirement are also more likely to accept the default option (not take a lump
sum distribution of their pension). This suggests that the guaranteed income stream generated
from their pension benefits may provide the security needed so these individuals can be accept
65
The vast majority of respondents report plans to be more conservative with their
investments in retirement, but still 20 percent plan to take a lump sum from their pension. The
middle group in Table 3.6 is disaggregated by scores on a general financial knowledge index.
For more information on the questions included in this index, see the Appendix. Somewhat
surprisingly, most knowledgeable respondents are less likely to annuitize. These more
knowledgeable employees may have the financial literacy needed to successfully manage their
investment accounts. The bottom group presents self assessed knowledge. Those that rate their
own financial knowledge as low (13 percent of the sample) are more likely to accept the default
options. It appears that confidence affects the choice these workers plan to make.
[Table 3.6]
The final table in this series, Table 3.7, considers the effect of spousal characteristics on
disposition choice. High spousal earnings are positively related with selecting the default option.
As pension benefits often offer spousal benefits, long spousal life expectancy may increase the
value of the pension benefits, however, those that believe their spouse will likely outlive them
(75 to 100 percent chance their spouse will outlive them) are least likely to accept the default
option.
[Table 3.7]
These relationships show some interesting and anticipated relationships between
distributional choices from retirement plans and demographic and economic characteristics of
individuals. A somewhat puzzling finding is that although annuities are more valuable for those
with the longest life expectancies, these individuals are the least likely to be planning to
disposition choice, controlling for observable demographic and economic characteristics, we
next turn to regression analysis.