Another disconnect between annuities and 401(k)s is how they’re funded. The 401(k) retirement plan is designed as an ongoing savings vehicle, whereas annuities are designed more for onetime purchases, says Spencer Betts, chief compliance officer at Bickling Financial Services in Lexington, Mass. “It is difficult,” Betts says, “for annuity companies to design a product that can handle ongoing contributions that may or may not continue long term.”
Fiduciary Responsibility
Nonetheless, if plan sponsors decide to include annuities, they should be prepared for certain challenges. “Since annuities must pay out over the lifetime of those purchasing them, it becomes a responsibility of the plan fiduciary to evaluate the financial viability of the company insuring the annuity,” says Amber Kendrick, vice president and retirement plan consultant at Procyon Partners in Shelton, Conn. “Retirement plan sponsors may be uncomfortable with assuming that kind of risk.”
Indeed, some say it’s not so much a matter of deciding whether to include annuities as picking the right ones. “Rather than asking what’s wrong with including annuities as an option within a 401(k), the question should be what kind of annuity is the right fit within a 401(k),” says Louisville, Ky.-based Craig Hawley, head of Nationwide Advisory Solutions. “There are many types of annuities that can serve different purposes during the three different stages of an investor’s financial life cycle—accumulating wealth, generating retirement income and legacy planning.”
To be sure, the current array of annuities includes countless variations. “Many of today’s annuities can be customized to your exact needs, so you pay only for features and add-on benefits that you need or are important to you,” says Cyrus Bamji, head of communications at the Alliance for Lifetime Income, a Washington, D.C.-based nonprofit dedicated to educating Americans about protecting retirement income. “This is one reason why we always recommend discussing annuities and the various add-on options with a financial advisor, and always in the context of a comprehensive retirement plan.”
Defining Goals
Dr. Steven Podnos, a certified financial planner at Wealth Care in Merritt Island, Fla. (he’s also a physician) says that using a 401(k) distribution to purchase an immediate annuity is “a fine option” for someone who is “worried about longevity risk and doesn’t need to provide for heirs.” But, he adds, “delayed annuities are generally a terrible choice due to high costs.”
That speaks to the importance of defining each client’s goals. “The individual objective is not always the most efficient use of capital,” says Philip Chao, principal and founder of Chao & Co., a wealth advisor in Vienna, Va.
For instance, clients who are primarily worried about maintaining retirement income will find annuities bring them peace of mind. For them, it scarcely matters if it’s inside or outside a retirement plan. But for those who don’t want to lock up their savings—who want “optionality,” as Chao puts it—annuities may not belong anywhere in their plan.
Deb Dupont, an associate managing director at the LIMRA Secure Retirement Institute in Windsor, Conn., takes the long view. “We can’t say there’s anything ‘wrong’ with including an option to annuitize, especially if the sponsor has done so responsibly and having exercised due diligence in the choice and it’s part of a menu of choices for the retiring participant,” she says.