Where Are the Retirement Tontines?

• Author: Pollack, Larry

The percentage of American workers currently covered by "defined contribution" (DC) retirement plans like 401(k)s is far higher than the percentage that has ever been covered by traditional "defined benefit" pension plans. In the United States, DC plan assets totaled $8.9 trillion as of September 30, 2022, according to

Investment Company Institute data, and over two-thirds of that money was in private-sector 401 (k) plans. In addition, much of the estimated $11.0 trillion of IRA assets as of that date was from 401(k) rollovers.

In retirement, the default way to make use of DC plan accounts is to withdraw funds ("decumulation") as needed or desired. This process risks participants running out of money before death or, on the flip side, spending less than was possible and not enjoying retirement to the fullest.

Surveys of employers and employees indicate interest in having options to generate lifetime income (to supplement Social Security benefits) from DC plan accounts. Congress has only recently started attempting to facilitate the conversion of DC plan balances into lifetime income. Under the influence of industry lobbying, Congress effectively endorsed the use of insurance products like annuities to provide such income in provisions of the 2019 SECURE Act. "Secure 2.0," which was part of the $1.7 trillion Consolidated Appropriations Act of 2023, further facilitates the use of insured products for retirement plans, primarily by relaxing aspects of the rules around required minimum distributions.

However, by addressing insured products only, Congress has implicitly, even if unintentionally, skewed the market to disfavor other approaches that would work better for many. Tontines are one such alternative. They are well-regarded noninsured financial arrangements that can be used to generate lifetime income from pots of money. They have proved successful in the United States and elsewhere. Unfortunately, they are likely not permissible for use by private-sector DC retirement plans. Congress would do well to consider retirement policy broadly to allow and facilitate the use of tontines, and possibly other non-insured arrange merits, for converting private-sector DC plan accounts into lifetime income.

How tontines work / Tontines are uninsured longevity-pooled accounts that can be used to provide retirement income certain to last a lifetime. They are always fully funded and require no capital reserves.

When a member of the longevity pool dies, her remaining account is distributed among the surviving members. To illustrate this process, consider a pool of a thousand 65-year-old female retirees. If each contributes $ 100,000 to the pool...