Investors Creating Own 'Pension Plans' by Rolling 401(k)s Into Annuities

With traditional pension plans fast becoming a quaint vestige of the past, investors are now creating their own "pensions" -- rolling their 401(k) plans into IRA-based annuities to guarantee lifetime income.

This trend is growing quickly, according to data released today by Spectrem Group. The percentage of 401(k) rollover assets placed in annuities during the 12 months through May 2004 quadrupled to 16%, from 4% in 2000. Annuity rollovers were most popular with retired investors or those nearing retirement age, based on responses to Spectrem Group's survey "The IRA Rollover Market 2004." One-third (33%) of World War II generation respondents who rolled over their 401(k)s chose annuities, compared with 24% of Baby Boomers and 20% of Generation X investors.

About 10 million individuals made a 401(k) rollover decision, involving assets of roughly $362 billion, during the 12 months covered by the study. Rollovers of 401(k) plans -- either into new 401(k)s or IRAs -- can take place when investors either leave the employer that is providing the plan or retire. Departing employees may also be allowed to leave their assets in the employer's 401(k).

"The growth in annuity rollovers is truly stunning, particularly since annuities typically are perceived as being more expensive than other investment choices such as mutual funds. This suggests the elimination of traditional pension funds has left a void for many investors, individuals who are not comfortable managing their own retirement portfolios to provide both income and growth. They would rather just receive a guaranteed, periodic check -- and they are willing to give up some return to do it," said Catherine S. McBreen, Managing Director of Spectrem Group.

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Keith and Samantha Isley

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Spectrem Group's study, "The IRA Rollover Market 2004," included responses from 784 investors who made a rollover decision during the 12-month period through May 2004. The data were gathered via a mail survey in April and May 2004 and have a margin of error of plus or minus 3.5 percentage points.

Source: spectrem.com - 10-30-2004