Lack of lump-sum distribution promotes annuitization of DB plansNews added by Benefits Pro on January 18, 2013

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By Paula Aven Gladych

The decision to annuitize your defined benefit plan or opt for a lump-sum payment hinges on the rules of your specific plan, a new study found.

More people annuitize if their plan rules restrict the ability to choose a partial or lump-sum distribution, according to new research by the Employee Benefit Research Institute.

Annuity and Lump-Sum Decisions in Defined Benefit Plans: The Role of Plan Rules” explored both types of plans from 2005 to 2010 and found that workers who had no plan restrictions on a lump-sum distribution had an annuitization rate of only 27.3 percent.

In all the years studied, plans with no lump-sum distribution options had the highest annuitization rates, very close to 100 percent, according to EBRI. Traditional defined benefit and cash balance plans with no restrictions on lump-sum distributions had the lowest annuitization rates.

In 2010, the annuitization rate for all plans combined was 65.5 percent, while for plans with no lump-sum distribution option it was 98.8 percent. The annuitization rate for defined benefit plans with no restrictions on lump-sum distributions was 44.3 percent, while for cash balance plans with no restrictions on lump-sum distributions it was 22.3 percent.

Annuitization rates tend to increase with age and account balance, but for younger workers, those ages 20 to 50, with low tenure, annuitization rates are low.

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