Retirement: Think twice about annuities in your plan
This article appears at the following website: sandiegouniontribune.com
The average large 401(k) plan offers 27 investment options, including stock funds, bond funds and target-date funds, according to a survey by the Investment Company Institute and BrightScope. Soon you may see another option on the menu: annuities.
Congress is considering legislation that would make it easier for 401(k) plans to offer equity-index, variable and other types of annuities. The provision is included in the SECURE Act (Setting Every Community Up for Retirement Enhancement), which passed the House in May and is pending in the Senate.
By law, 401(k) plans can offer annuities, but only about 10% of them do, in part because employers are afraid they could be sued if the insurance company behind the annuity fails to pay claims. (Annuities are more common in 403(b) plans, typically offered to teachers and nonprofit workers.) The legislation would protect employers from such lawsuits as long as they meet specific conditions.
Proponents of the measure -- primarily insurance companies -- say it would give employees an investment option that would convert to a stream of income once they retire, similar to the type of payments retirees receive from a traditional pension.
The legislation would also make annuities inside 401(k) plans portable, so workers who leave their jobs could roll them into another plan or IRA without incurring surrender charges and other fees.
Annuities help address anxiety over income security, but many planners question whether an annuity is an appropriate investment for most 401(k) participants. Some annuities come with high fees -- which the legislation doesn’t address -- that will weigh down your returns. “It could be a very expensive way to invest inside your 401(k),” says Jamie Hopkins, director of retirement research for Carson Wealth, a wealth management firm. That could change if major providers decide to add annuities to the 401(k) plans they administer and put pressure on costs, Hopkins says. BlackRock, which has $6.5 trillion in assets under management, is considering adding annuities to the 401(k) plans it manages.
If the idea of a regular paycheck in retirement appeals to you, there are other ways to accomplish that goal. After you retire, you can use a portion of your savings to buy an immediate annuity. With these annuities, you give an insurance company a lump sum in exchange for a monthly paycheck for a specific period or the rest of your life. A less-expensive option is a deferred-income annuity, which provides a guaranteed source of income once you reach a certain age. For example, a 65-year-old could purchase an annuity that starts making payouts at age 80. An insurance broker can help you shop for the best deal, or you can compare payouts at online brokerage sites such as www.immediateannuities.com.