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What to Know When Considering an Annuity in Your 401k


If you’ve got a 401k plan at work, you probably hear a lot about using annuities within your plan.  Currently, 16% of employers offer annuities within their 401k plans.  Workers are not forced to use them, but many recent studies have found that annuity products are a good way to convert retirement savings into a stream of income during retirement.  This is the closest we’ve been able to come to the pensions that were consistently offered by most employers through the 1970’s.  Some people are still lucky enough to receive pension income at retirement, but if you are not, creating an income stream that lasts can be a challenge.  Scott Holsopple’s U.S. News & World Report article, “Annuities in Your 401(k)? What You Need to Know,” offers some pros and cons of using annuities in 401k plans.  The author also gives readers some tips on what to ask if you are considering an annuity in your 401k plan.

When something is relatively new, like annuities in 401k plans, it always draws opponents.  Some of the arguments against using these guaranteed income streams in retirement plans are the safety of insurance companies staying around, potentially high fees, some complicated and confusing products, the portability should you leave your employer, “wasted” tax benefits, and the risk of putting all of your retirement money into one pot.  Most of these potential issues are entirely avoidable and a lot of the naysayers don’t even look at the positive value or ways to use annuities without encountering these negatives.  I have to agree though, that if you can’t take your annuity with you when you leave an employer to work elsewhere, that is a downside.  Although that may be the case with some annuities, many aren’t even purchased until right before retirement, so you know that you won’t be going to work for another employer and face surrender charges.

The Secure Annuities for Employees Retirement Act (SAFE) of 2013, introduced by Senator Orrin Hatch, helps make it easier for annuities to be offered in 401k plans and makes sure that the portability argument is not an issue.  It could take awhile before this becomes law, if it even does, but annuity use in 401ks will skyrocket if this act becomes law.  The author recommends five things to consider if annuities are an option for your 401k plan.  Ensure that your fees are not too high by comparing them to the industry average and your particular benefits.  Make sure that the insurance company has a high financial strength rating, especially if you are using more money that the state guarantees with annuities.  Know the surrender charges and make sure that they work with your financial plan.  In the case that you leave your employer, know what happens to both your 401k plan and your annuity.  Make sure that someone has explained all of the benefits, risks and details regarding your annuity before you make the choice.  Using an annuity in your 401k plan can help guarantee lifetime income payments, but you need to know that your particular product is right for your situation.

Written by Rachel Summit

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