Rethinking Retirement Defaults
Why Annuitizing a Portion of 401(k) Assets Could Be a Smarter Move
It’s no secret that retirees struggle with one of the most complex questions in personal finance: How do I make this lump sum last the rest of my life?
A recent study conducted by Horneff, Maurer, and Mitchell—respected academics from Goethe University and the Wharton School—dives into this issue using a lifecycle model of retirement planning. Their findings? Automatically defaulting just 20% of a defined contribution (DC) plan balance into an annuity at retirement (typically around age 66) significantly improves financial outcomes for most retirees.
We read the paper. It’s thorough, rigorous, and supports what many of us working in the field have observed anecdotally for years: retirees don’t make optimal decumulation decisions on their own. And why would they? Retirement income planning is a high-stakes, one-shot deal.
Here’s what stood out:
Behavioral Insights Back the Strategy
The research relies on a lifecycle consumption model and simulates how retirees behave under uncertainty—market volatility, health shocks, longevity risk. In nearly every scenario, the model shows that retirees under-annuitize when left to their own devices, often due to fear of irreversibility or lack of understanding. Yet when defaulted into a partial annuity—meaning they can still opt out—most stay the course and achieve greater lifetime utility. That’s the power of a smart default.
The takeaway? Retirees benefit most not when they’re forced to annuitize, but when they’re nudged in that direction with an opt-out clause.
The 20% Threshold Isn’t Arbitrary
Horneff et al. ran simulations across income levels, health profiles, and financial literacy bands. A default of 20%—above a liquid cash threshold of about $65,000—hit a Goldilocks zone:
Low enough to preserve flexibility and account access.
High enough to provide meaningful longevity insurance.
Efficient enough to improve consumption smoothing into later life, particularly when paired with deferred income annuities that begin at age 80 or later.
Interestingly, increasing the default rate to 30% or 40% yielded diminishing returns, especially among lower-income retirees. At that point, liquidity concerns begin to outweigh the additional income benefit.
Different Demographics, Different Outcomes
The paper doesn't paint with a broad brush. It acknowledges that not all retirees are the same. College-educated individuals, for example, tend to live longer and delay Social Security. In those cases, layering in an annuity product creates synergy—a base of guaranteed income that complements delayed benefits and portfolio withdrawals.
On the other hand, those with lower life expectancy or heavier reliance on Social Security gain less from additional annuitization. The model accounts for these variations, which is precisely why customized defaults, rather than mandates, are key.
Regulatory Constraints—and Opportunities
While the academic case for partial annuitization is compelling, the regulatory landscape remains a hurdle. Under current Qualified Default Investment Alternative (QDIA) guidelines, default investments in DC plans must be fully liquid. Most annuities, by their very nature, are not. That means even a 20% automatic default into a deferred income stream runs afoul of current rules.
However, there are viable paths forward:
Employer contributions as a funding source: Current rules allow plan sponsors to direct employer match dollars into annuity contracts, while employee contributions remain in liquid funds. This workaround aligns with the study’s partial-default framework and helps spread guaranteed income without limiting participant choice.
Pending legislation: The Lifetime Income for Employees Act (LIFE Act) proposes expanding the definition of QDIA to include certain annuity options. If passed, this would open the door to smarter plan design—defaults that actually serve the decumulation side of retirement planning.
Custom plan features: Even without federal action, plans can offer “opt-in” annuitization windows at retirement with pre-selected defaults. These could be paired with educational materials, financial coaching, or one-on-one counseling to encourage uptake.
The Horneff-Maurer-Mitchell research is one of the clearest signals we’ve seen from the academic world that partial annuitization—especially when built into the default structure of retirement plans—can materially improve outcomes. The beauty of the 20% model lies in its moderation. It doesn’t seek to replace personal choice or restrict liquidity. It simply nudges people toward a more resilient financial future—something most retirees say they want, but often fail to implement.
For plan sponsors, policymakers, and benefits professionals, the message is clear: we’ve spent too long focused on helping people accumulate savings. It’s time we start helping them turn those savings into security. A well-designed default—backed by data and behavioral economics—can strike the balance between autonomy and protection.
If Washington is serious about retirement readiness, it should modernize outdated rules and give plan sponsors the tools they need. And for those of us already building better benefit strategies for business owners and employees, the research couldn’t be clearer: when structured thoughtfully, annuities can be not just a product—but a pillar of lasting retirement income.
