In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act made it easier for defined-contribution retirement plans such as 401(k)s to offer annuities. Nearly five years later, though, the results are mixed, according to advisors.

“We are still not seeing much adoption,” said Wei Hu at Edelman Financial Engines in Santa Clara, Calif. “While the promise of a guaranteed income stream is appealing, purchasing an annuity is often seen as a complicated, expensive, and sometimes irrevocable decision.”

Income-guaranteeing annuities are often described as a kind of pension, yet “few employees are using them,” said Tamiko Toland at 401(k) Annuity Hub, a consultant group in Ithaca, N.Y. “There remains work to be done to help 401(k) participants understand how best to use [the option]."

The SECURE Act extended “safe harbor” provisions for plan sponsors, essentially protecting them from liability for potential annuity defaults. But that’s not enough to assuage employer’s concerns, advisors say. Many still worry about their fiduciary duty to “assess an insurer’s ability to meet future payment obligations, which is seen as a challenging task,” said Victor Hicks II at Perigon Wealth Management in Southfield, Mich.

In addition, plan sponsors often complain that annuities are difficult to understand, said Paul Sarama of the Baker Sarama Wealth Management Group at Steward Partners in Paramus, N.J. “Certainly the lack of transparency around fees and the perception that annuities are laden with high costs provide a headwind to broader adoption,” he said.

Bob Janson of Alera Group Retirement Plan Services in Deerfield, Ill., expressed a similar view. “It is difficult for plan sponsors to sift through the array of choices and determine the most appropriate vehicle for the variety of needs across their diverse participant demographics,” he said.

His colleague Christian Mango at Alera Group in Winchester, Mass., concurred. “There is no standardized evaluation process to compare the suitability of potential options, and that poses a real challenge,” he said.

To be sure, plan sponsors and employees alike may want guaranteed income, said Michael Lepore at GYL Financial Synergies in West Hartford, Conn. “But add the caveats that it comes with potential educational, complexity, cost, liquidity and portability complications to understand and communicate, combined with the irrevocable nature once annuitization commences, and people tend to be less enthusiastic,” he said.

Nothing To Be Afraid Of
The qualms, however, may be misplaced, said Michael Finke, a professor at the American College of Financial Services in King of Prussia, Pa. “Annuities don’t need to be any more complex than investment products,” he explained. “You simply place the money in the product and receive a future income guarantee.”

Retirement-plan annuities aren’t even new or rare, he added. They “have existed in 403(b) plans for a long time”--referring to retirement plans for many teachers and other employees of nonprofit organizations.

Others point out that annuities can provide greater clarity than stock and bond funds. “For participants who do not want to think about market moves or how they can build assets for distribution, an annuity solution can be excellent,” said Jason Branning of Branning Wealth Management in Ridgeland, Miss.

To address what they hope will be a growing market, many annuity providers have been developing products specifically designed for defined-contribution plans.

Nationwide, for instance, boasts that as of March 31, nearly 7,000 defined-contribution plans offered one of its guaranteed-retirement-income solutions, representing almost $5 billion in assets under management, according to Cathy Marasco at Nationwide Financial in Columbus, Ohio. “That represents a 565% [year-over-year] increase in plans [and] a 367% increase in assets under management,” she said.

Brian Sward at Jackson National Life Distributors in Franklin, Tenn., said that his firm’s in-plan annuity solutions have been added to Alliance Bernstein’s Lifetime Income Strategy platform, which accumulated more than $11 billion in aggregate assets through the end of the first quarter. “Interest [in guaranteed-income solutions] has been on the rise,” he said.

Matt Condos at Lincoln Financial Group in Hartford, Conn., is similarly optimistic. Between 2022 and 2023, he said, there has been a 26% increase in the number of 401(k) participants choosing one of Lincoln Financial’s in-plan annuity solutions. These products “can add value to the plan sponsor and for participants, without being overly complex for either party,” he said.

Target-date funds that give savers the option of moving a percentage of their account to annuities is another growing trend, according to James Szostek at the American Council of Life Insurers in Washington, D.C. “It is still a fairly new market, but I could see this gaining traction with participants and plan sponsors, particularly for those that prefer an incremental approach to annuity benefit accumulation,” he said.

Last April, for example, BlackRock debuted its LifePath Paycheck funds, which are target date funds that primarily hold equities when an employee is young and automatically reallocate to fixed income instruments as retirement nears. But when the participant turns 55, the funds can begin to invest in annuities if the planholder wishes. That allocation can grow to 30% of the portfolio, with the other 70% remaining in stocks, bonds or cash.

Since inception, “the strategy has inflows totaling $11 billion, with a robust pipeline of plan sponsors expressing interest,” said Anne Ackerley, head of BlackRock’s Retirement Group. “To date, a total of 15 plans have either made or are planning to make LifePath Paycheck available for their employees.”

These plans are “early adopters,” said Brian Miller, head of target-date product management at Vanguard in Malvern, Pa. But whether target-date funds with annuities continue to gain traction “remains to be seen,” he said. As of this writing, Vanguard has not announced plans to launch its own target-date funds with annuities.

Verdict Is Still Out
Joshua Weinstein at Fidelity Investments in Fairfield, Conn., put it this way: “It’s safe to say there’s great demand for guaranteed income solutions, as employers recognize the financial challenges their employees approaching retirement are up against.” Fidelity offers employees the option of converting savings into institutionally priced annuities at retirement, but it doesn’t offer 401(k) plans a target-date annuity fund.

Overall, advisors remain divided on the pros and cons of annuities. ”With the right amount of education and the right plan design, [annuities] can be part of the solution to help retirement plan participants achieve their goals and dreams,” said Chirag Chauhan, an LPL financial advisor at Bluff City Advisory Group in Memphis, Tenn.

Other advisors, however, aren’t convinced. “I’m not a plan administrator and cannot speak to the issues they might have, [but] when we help clients manage their 401(k) accounts, we never use annuities,” said Bridget Venus Grimes, a CFP Board ambassador and president of WealthChoice in Coronado, Calif. “If a portfolio is diversified in inexpensive, tax-efficient funds, and employees are contributing to their accounts consistently, they will likely meet their goals [without annuities].”

Meanwhile, advocates for in-plan annuities insist that time is on their side. “Like other new financial products introduced into employer plans in the past, it takes time for these provisions to be adopted,” said Jason Fichtner at the Alliance for Lifetime Income in Washington, D.C.

No doubt there are many reasons to expect greater adoption, said Justin Morgan at American Trust Wealth, a part of AmericanTCS in Lexington, Ky. He cited the large number of baby boomers who are retiring, annuity advances that make them cheaper and more appealing, and “upgrades to recordkeeping platforms and technology [that] have improved operational efficiency,” he said.

Early projections for rapid adoption of in-plan annuities may have been premature, acknowledged David Blanchett at PGIM, the investment management group of Prudential in Lexington, Ky. But he said he remains “optimistic about its future growth, [despite] the variety of frictions that exist.”