Speak with a Registered Agent: 1-866-223-2121

Talk to an Agent

Request Info

Speak with a Registered Agent: 1-866-223-2121

401k Plans May Default Money into an Annuity Product


Many Americans will benefit from using a 401k annuity. By transferring some of your 401k funds to an annuity product, you can guarantee a lifetime income stream that you will not outlive. Some 401k plans are starting to default your funds into an annuity, something that Walter Updegrave questioned the ethics of in the Money article “Should Your 401(k) ‘Nudge’ You Into an Annuity?” The Boston College Center for Retirement Research proposed a plan where 401k sponsors would default a percentage of their retirement savings into an annuity product at retirement. While this would be an automatic transaction, you can opt out of having your money transferred into the annuity. Updegrave questions whether this is a necessary step because many people won’t choose the annuity they may need on their own accord or whether 401k plans should mind their own business to avoid putting people into an investment they don’t necessarily need.

The knowledge that you have annuity income coming in for the rest of your life has been shown to increase retirement happiness and even a retiree’s standard of living. Updegrave says that he has recommended annuities to clients for years because of their guaranteed monthly income. He said that immediate and longevity annuities, the simplest forms, are most recommended because the other types can get complex for some people to understand. The research brief clearly demonstrated the value brought about from having an annuity as part of your retirement plan. They tried to determine why so few people annuitize and found that they are either scared they will die soon after purchasing an annuity and lose out on the value of their purchase or they cannot easily see the value in the monthly payments versus the lump sum of $100,000 or so. The researchers tried to determine what could be done to get around the so-called behavioral impediments keeping people from buying an annuity and came up with the idea to default some of their 401k balance into an annuity.

So the theory is that by defaulting some of your money into an annuity because you might not do it yourself, you are able to reap the benefits and ensure that you won’t run out of money in retirement. But Updegrave worries about the assumption that someone else knows what is best for you better than you do. It’s very important to consider each person’s situation individually, especially including how much guaranteed income they already have coming in from other sources like Social Security. Buying an annuity is a personal decision, one that should be carefully considered by the individual and a financial expert. I think that it might be beneficial for people to be nudged into an annuity with some of their 401k savings because it will at least force them to consider this option that can secure their financial future. Of course they should have the option to opt out of this default without difficulty. There must be a wealth of information given before the annuity is purchased and penalties for changing the decision are given.

Updegrave doesn’t like the idea that people might be persuaded to do something because of the expert information they are given. He thinks that annuities are a good way to guarantee lifetime income from your 401k plan, but doesn’t necessarily support the annuity as a default. 401k plans have a lot of different defaults though; it’s certainly not only the annuity option. Defaults can be good for many people who just don’t take the time to figure out what options will be best for their future though. Annuities are not the best option for everyone, that is something most experts can agree upon. But there are many Americans who would greatly benefit from the guaranteed lifetime income that annuities pay retirees. The best advice is to speak with an expert about annuities and how they could offer you value in your retirement planning. Whether you are nudged into an annuity product by your 401k plan or not, do your research and learn about annuities’ value before finalizing any decisions.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

For more information about the product mentioned in this article contact us here:

Information Request Form

If you have questions or would like more information, please complete this form and a licensed professional will be happy to help.