The research explores how trial annuity periods address behavioral barriers to annuitization and the challenges of structuring such programs with fixed versus variable annuities. It also overviews the design and early experience of Income Test Drive (ITD), a program that allows potential annuity buyers to experience annuity-style payouts for up to two years before making an irreversible annuitization decision.
Summary
TIAA's Income Test Drive program enables retirement plan participants to receive annuity-style payments for up to two years before deciding whether to convert their remaining balance into a lifetime annuity, essentially a trial annuity. The paper highlights considerations for trial annuity design and the important distinctions between fixed and variable annuities in trial period design, noting that variable annuities better insulate participants from interest rate risk during the trial period, it then overviews the experience of those who adopted ITD between 2008 and 2024. We discuss several design issues about the structure of ITD programs, the way in which insurers could structure annuity on-ramps for retirees, and how risk-sharing is affected under different arrangements.
Key Insights
- Variable annuities paired with trial periods avoid the investment-related uncertainty about future payouts that would occur with fixed annuities, as participants bear portfolio return risk rather than the insurer.
- 52.1% of Income Test Drive participants annuitized their balances after the two-year trial period, demonstrating moderate uptake of lifetime income following the experience as the average participant used over 80% of their eligible assets for ITD.
- The program functions primarily as a behavioral intervention rather than a new product offering, reframing the annuitization choice through experiential learning about regular income streams.
