Many working Americans are counting on their 401(k) to help get them through retirement. Because they’re living longer, retirement lasts longer than ever before. So the risk of outliving—or outspending—savings is very real.
Some advocates for annuities contend that they have a solution. Annuities, they point out, are the only savings vehicle that carry a guaranteed, contracted, lifetime income stream, outside of Social Security and pension benefits. So why not use them in 401(k) plans?
"Ensuring that Americans can save sufficient assets for retirement and be able to convert those assets into an income that is guaranteed to last throughout their retirement is among the most critical issues facing our economy over the next generation," said Tim Walsh, senior managing director of institutional and endowment distribution at TIAA, a leading annuity provider, based in Waltham, Mass.
Others insist that annuities don't belong in 401(k)s for a variety of reasons. "My opinion as an attorney, not an investment expert, is that annuities are expensive and do not operate efficiently in a 401(k) plan," said Joshua Sutin, employee benefits attorney and shareholder at Chamberlain Hrdlicka, in San Antonio.
They "may help individuals with a stream of income they can plan out with their investment advisor," he acknowledged, and they "can be a good creditor-protection vehicle," Sutin said, but it's best not to dive in without "a trusted professional investment advisor [to] help decide."
There are legal reasons why annuities don't figure more prominently in 401(k) plans. The annual non-discrimination test and/or "safe harbor" requirements with which 401(k)s must comply can be onerous and unclear about how to evaluate the relative financial strength of different annuities providers. "It is hard to find a good [annuity] product with reasonable fees that also fits the investment policy statement guiding the fiduciaries" who administer the 401(k)s, said Sutin.
Another concern is that annuities are designed to accomplish specific things for particular clients, making them far from a one-size-fits-all solution and posing difficulties for 401(k) administrators.
"Each plan participant may be better served by different annuity offerings, [and] this represents an impractical barrier for plan fiduciaries," said Joe Heider, a chartered financial consultant and president of Cirrus Wealth Management, in Cleveland, Ohio.
Annuities "are complicated instruments," said Heider, citing their surrender periods and liquidation penalties, among other complications. Due to these facts, they are not easily reviewed by plan sponsors and fiduciaries to determine if they are in the best interest of the participant.
Heider didn’t feel that annuities make a good fit for 401(k)s. "Although annuities can play an important role in providing financial security during retirement," he said, "they are better suited in an IRA or owned directly by an individual."