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

Vanya Horneff, Raimond Maurer and Olivia S. Mitchell

No 484, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

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.

Keywords: life cycle saving; household finance; annuity; longevity risk; 401(k) plan; retirement (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 G22 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:341406

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