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Annuities in 401k Plans Increasing


According to a study performed by The Hartford, 90% of workers aged 20-49 would like to have a guaranteed stream of income from their 401k plan at retirement.  In CNBC’s article “Does your 401(k) have an annuity?,” Rob Reuteman discusses the changing opinions towards annuities in 401k plans.  Even though pensions started being filtered out decades ago, it has taken this long to really get an interest in annuities used in 401k plans.  An annuity is the best way to ensure that part of your 401k is used to give you a stream of monthly income in retirement, similar to pension payouts of the past.

Only 22% of the $9.7 trillion in private pension assets is attributed to defined benefit plans like pensions.  The number of people in these plans went down more than 30% to 19 million from 1975-2007.  Most of the rest of the $9.7 trillion is attributed to 401k plans and IRA’s.  More than 67 million people have these types of defined contribution plans, six times the number in 1975.  A member of the U.S. Department of the Treasury said that their hope is for these newer plans to offer the same type of guaranteed income as the pensions of the past.  That is why they are using changes in the IRS laws and other incentives to encourage people to use part of their 401k savings to purchase an annuity.

This year, 500 large U.S. businesses were surveyed to see how many of them offer annuities as options in their 401k plans.  Currently, 16% offer such a choice for retirement income, but 22% more said that annuities will become an option in their 401k’s this year.  That is a tremendous jump in annuity offerings, likely in part due to the strong support from the federal government.  Most of the insurance companies and mutual fund companies welcome this increase, as do the large 401k plan administrators.  One firm warns that employers really need to adopt the choice of annuities in 401k plans in order to stay competitive with other companies.

Only 1% of people over 65 were receiving annuity income in a 2008 survey.  While this number has increased since then, that is still a huge opportunity for annuity growth as retirement income.  Unfortunately for those offering annuities, one of the biggest deterrents to the products are people’s misconceptions.  They have (often valid) concerns that they will die too soon, the products are too complex, inflation will hurt them, or they have too high of fees.  But many of these people haven’t see all that current annuities have to offer, which includes death benefits, less complexity, inflation adjustments, and more.  Using annuities in conjunction with 401k plans can work for many Americans.  The slow and steady process of increasing the offerings will likely lead to a much larger percentage of retirees receiving monthly annuity checks to cover their basic living expenses.  It just takes time and a plethora of education to get there.

Written by Rachel Summit

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