Simply Money

Simply Money

Each weeknight at 6pm, Simply Money makes money simple for you. Join hosts Amy Wagner and Steve Sprovach as they share easy-to-understand and...Read More

 

Annuities in 401(k)s: Good idea?


Question: Kevin from Harrison: I saw that annuities are going to be available in 401(k)s. Is this something you would recommend choosing?

A: Currently, only about 10% of 401(k) plans across the country offer annuity options according to the Plan Sponsor Council of America. But, to your point, we wouldn’t be surprised if they start becoming a bit more prevalent. That’s because, back in 2019, the SECURE Act removed some of the legal liability for employers if the insurance provider were to go under or not be able to meet their obligation. Since that worry is now gone, it’s likely more employer plans will start providing the option.

One of the biggest benefits of an annuity is the lifetime income stream it can provide. And, given that company pensions are going the way of the dinosaur, this kind of guaranteed income is hard to say ‘no’ to. But, like we’ve said many, many times in this column over the years, the devil is in the details. Because an annuity – even in a 401(k) – is still a contract with an insurance company. And some types of annuities can be fairly complex and quite expensive, coming with extra fees such as internal fees, a contract fee, and possibly even a fee to withdrawal your own money

If you absolutely, hands-down want the security of an income stream in retirement, then buying one in your 401(k) could make sense. But, on the flip side, you’ll be paying more over the long run for that security. So, ask yourself what’s more important – a lifetime guarantee, or using ‘regular’ 401(k) investment options that don’t come with extra fees?

Here’s The Simply Money Point: Not all annuities are bad. In fact, for some folks, they can make a lot of sense for their financial situation. But you really need to dig into the nitty gritty details before buying one inside your 401(k). And if you don’t want to (or aren’t sure how to), at least take the time to find a fiduciary financial advisor who will dig in for you. They can help you better understand how the sausage is being made.


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