I’ve written about the "annuity puzzle" before. That’s the investment industry term for the disconnect between the economic arguments of annuitizing a lump sum amount and the investor’s aversion to doing so. Most of the retirement plan industry attention recently has been focused on the "annuitization" of 401(k) plans. That is, adding annuity options to 401(k) plans in response to retirees and pre-retirees who are significantly underestimating how long they need to make their retirement savings last.

Whether that effort is successful is a topic for another day. But let’s not forget that there are still defined benefit plans out there. A recent study by Gary R. Mottola, Stephen P. Utkus at the Vanguard Center for Retirement Research, Lump Sum or Annuity? An Analysis of Choice in DB Pension Payouts, adds to the understanding off the annuity puzzle in a defined benefit environment.

They examined distributions from two Fortune 500 defined benefit plans and one cash balance plan. In brief, their study indicated that many married participants chose to “deannuitize” their benefit in their defined benefit plans. In other words they chose a lump sum over the ERISA-mandated joint and survivor annuity default by submitting the required written, notarized waiver.

Here is what Mr. Mottola and Mr. Utkus say about the implications of their findings:

The desire among married participant in their 50s and 60s to “deannuitize” a DB plan distribution appears to be quite strong, and stands in sharp contrast to the inertia typically displayed by defined contribution participants in the accumulation phase. As a result, plan design and policy efforts that rely on inertia and default choices to encourage annuitization within retirement plans are likely to have only modest effects. Meanwhile, the fact that annuitization rates rise with age suggests that the demand for traditional annuities may arise later in life, at an age when many participants have already retired and left their employers’ retirement plans. Also, annuity demand may increase in tandem with the broader trend toward taking a later retirement.

Here is a link (PDF) to their study.

Hat tip to the Financial Page blog.by Barry Barnitz.