Yet that argument only goes so far. “Tax deferral is not the main reason people purchase an annuity,” says Jack Dolan, a spokesperson for the American Council of Life Insurers (ACLI), a Washington, D.C.-based industry group. “They buy it for the unique insurance features.”
Those features can come in a variety of forms. “Immediate annuity options in a 401(k) plan can offer certainty of lifetime spendable income comparable to pensions previously offered by employers,” notes H. Adam Holt, a certified financial planner, chartered financial consultant and CEO of Asset-Map, a Philadelphia-based financial technology provider. “In other cases, some fixed deferred annuities can provide bond-like returns without the typical bond mutual fund principal volatility in rising rate environments.”
Too Complex For Plan Sponsors?
Given all these and other intricacies, annuities can be difficult for clients to grasp. But difficult doesn’t always mean bad.
“There is nothing wrong with including annuities as an option in a 401(k) plan,” says Scott Matheson, a managing director and defined-contribution practice leader at CAPTRUST, a fee-based advisory headquartered in Raleigh, N.C. However, he says, “plan sponsors should monitor that annuity with the same prudence and rigor that they would any plan-designated investment option—and, of course, only add it if it’s in the best interest of the participants and their beneficiaries.”
The plan sponsor would not only have to select the types of annuities to make available but also “decide if additional features or riders are needed,” says Matheson, citing the need for cost-of-living adjustments, death benefits and “joint and survivor” options that would ensure a surviving spouse receives income after the first annuitant dies.
The plan sponsor should also weigh costs. “Are you able to achieve institutional pricing?” Matheson asks. If not, annuities can be relatively expensive.
Other Disadvantages
Perhaps a greater problem is that annuities in 401(k)s are “typically not portable from one plan to another,” says Toni Brown, a San Francisco-based senior vice president of retirement strategy at the Capital Group. “This is problematic when you consider that the average wage and salary workers will have had upwards of 10 different jobs—and therefore, 10 different 401(k) plans—over their working lifetime. As a result, participants who purchase an in-plan guarantee may become tied to that specific plan for life, or may be forced to surrender and leave the guarantee behind when they move their assets outside of the plan.”
Brown says that retirees may be better served by annuities purchased outside the 401(k). “In-plan annuity offerings often provide guarantees that are less robust than those available to individual investors in the open marketplace,” she says.