Workers Lack Information When Making Lump-Sum Decisions

A MetLife study found workers are not being presented with enough useful information when offered the chance to take either a lump sum or an annuity at retirement.

A MetLife study found workers are not being presented with enough useful information when offered the chance to take either a lump sum or an annuity at retirement. Even when online tools are offered, many workers don’t use them. This results in a situation where many workers are making an important decision without fully understanding the potential consequences.

Fewer than half of all surveyed defined-benefit (DB) plan participants recall seeing information comparing the lump-sum amount to the total value of annuity payments. (A pension is a defined-benefit plan.) Only 39% of defined-contribution (DC) plan recall receiving information about how much income their savings will provide in retirement. (Examples of defined-contribution plans are 401(k) and 403(b) plans.) Smaller percentages of respondents recall being cautioned about the risks of outliving the lump-sum amount or spending it too quickly. Only slightly more than one in four say they were given tips about coordinating their pension or workplace savings with Social Security and other sources of retirement income.

Rather, retirees say the factors influencing their decisions included their then-current financial circumstances (58%) and the tax treatment of the payment options (42%). Just 20% said they took their family’s history of longevity into account. Attitudes about risk played a significant role, with nearly half (46%) of DB and DC plan participants who took a lump sum describing themselves as “risk-takers.” Conversely, nearly two-thirds (64%) of those who opted for the annuity described themselves being “risk-adverse.”

Of those who took a lump sum, approximately one of five (21%) spent all of their lump sum within 5½ years, on average. Additionally, 35% of those who hadn’t spent their entire lump sum are concerned about outliving the remaining amount.

There are some caveats to be considered before drawing conclusions from the last paragraph. The average retirement ages of those surveyed were 58 for defined-benefit plans and 61 for defined-contribution plans. The average lump sums were $192,357 for defined-benefit plan participants and $239,792 for defined-contribution plan participants. Thus, many retired early and without enough identified wealth to fund the early retirement. Potentially compounding matters was the fact that nearly two-thirds of lump-sum takers reported “major spending” within the first year of retirement.

Source: “Paycheck or Pot of Gold Study: Making Workplace Savings Last,” MetLife, April 2017.