Annuities in 401(k) Plans Offer Income, but High Fees
Kim Miller isn't worried about running out of money in retirement. Her 58-year-old husband, Rick, retired from California's public university system a few years ago. He now receives an annuity from his former employer, offering them a steady stream of income.
"We have a monthly check that comes in that covers basic expenses," says Miller. "It's very nice to know that down the road things will be taken care of."
With many Baby Boomers' retirement accounts decimated in the aftermath of the financial crisis, federal officials have been exploring ways to make sure American workers don't outlive their savings.
Annuities inside a 401(k) plan may be one alternative.
Some 401(k) plans allow employees to choose to have a percentage of their contributions invested in an annuity, giving them a guaranteed income stream.
A recent survey by Aon Hewitt found 19 percent of mid-to-large U.S. companies already help facilitate annuities outside or inside a company's 401(k) plan. This year, about 13 percent of employers intend to offer annuities among their 401(k) offerings, the survey found.
Annuities in these plans are expensive. Fees average over two percent—double that of 401(k) plans that hold low-cost mutual funds, according to Brightscope.com.
Certified financial planner Doug Lockwood says annuities inside 401(k) plans may not make sense for all employees. "If you have plenty of liquidity, you might not need it. If you have multiple incomes streams, you might not need it," says Lockwood, a principal at Harbor Lights Financial Group in Manasquan, N.J.
But, "if you don't have a whole lot. If this is what you're resting your future on for your income, it makes sense to take a look at it if its inside of your plan," he says. Just remember to also check to see if the annuity inside the 401(k) plan is "portable"—you want to make sure you can take it with you if you change jobs.
Lockwood says, for some, the added security is worth the expense. "If your account goes down 20 percent, and you're five years away from retirement and we can't recoup that 20 percent, it doesn't matter the cost," he explains.
Miller agrees. For her, the sense of security is priceless.
"If you have at least part of your income that you can rely on," she says, "from my personal experience it does make life a lot better."