Background:

Products that offer guaranteed income, such as annuities, have the potential to radically simplify the income decision process for retirees. What is less clear, though, is howannuities might influence investor trading behavior during times of market volatility.In other words, is there any relationship between owning an annuity and the likelihood of a DC participant trading his or her account during times of market turmoil?

To answer this question, I explored the 2020 trading activity among DC participants aged 55-70 who had access to a guaranteed lifetime income product (GLIP), in particular, an annuity with a guaranteed lifetime withdrawal benefit (GLWB) in their DC plan. The following is a summary of my findings.

Findings:

The analysis clearly suggests that participants who allocated to a GLIP had a lower probability oftrading in 2020, especially those with higher balances. The relationship is statistically significant and robust across the different ways participants were managing their accounts (e.g., self-directing, in a target date fund, etc.). In other words, as the allocation to a guaranteed lifetime income product increased, the probability of a DC participant trading declined in the dataset.

Bottom line:

While previous research on guaranteed lifetime income products largely focuses on the economic benefits of the strategies, this research suggests there is an additional behavioral benefit: Participants who allocate to the strategies appear to beless likely to trade during periods of market volatility.

In the previous Research Minute,I noted how older participants had the highest probability of trading during 2020. Therefore, strategies that help these participants “stay the course,”which include guaranteed lifetime income products, deserve special attention from plan sponsors and DC consultants.