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Defaulting 401(k) assets into payout annuities for "pretty good" lifetime incomes

Author

Listed:
  • Horneff, Vanya
  • Maurer, Raimond
  • Mitchell, Olivia S.

Abstract

Some US defined contribution plans offer retirees access to an annuity or lifetime income stream as payout options from their 401(k) accounts. Nevertheless, for behavioral reasons, some retirees may hesitate to elect lifetime income streams as a drawdown vehicle. To counter this, plan sponsors could automatically allocate a portion of retirees' 401(k) assets to annuities, now that regulatory barriers to doing so have eased. Using a lifecycle economic model, we evaluate the pros and cons of defaulting retirees' 401(k) assets into payout annuities. We show that defaulting 20% of a retiree's assets over a threshold into an immediate annuity enhances retirement security for most plan participants. An annuity deferred to the age of 80 is particularly beneficial to college graduates, in terms of enhancing their welfare.

Suggested Citation

  • Horneff, Vanya & Maurer, Raimond & Mitchell, Olivia S., 2026. "Defaulting 401(k) assets into payout annuities for "pretty good" lifetime incomes," SAFE Working Paper Series 484, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:341406
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    References listed on IDEAS

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    9. Annamaria Lusardi & Olivia S. Mitchell & Noemi Oggero, 2018. "The Changing Face of Debt and Financial Fragility at Older Ages," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 407-411, May.
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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