Before choosing to include an annuity in your employer-sponsored plan, what are some things you should consider?

By Sean Sparkman

You may be aware that on January 1, 2020, Congress enacted a significant and far-reaching piece of retirement legislation. The Setting Every Community Up for Retirement Enhancement Act, known commonly as the SECURE Act, is one of the most impactful laws since the 2006 Pension Protection Act. 

The SECURE Act accomplishes several goals, including providing more access to IRAs and other employer plan accounts. SECURE also makes it easier for small businesses to offer retirement plans.

SECURE also gives employer plan participants increased access to annuity products, with member employers now actively embracing the idea of offering annuities in their qualified plans.

But, is this option the right one for every employee? Should you add an annuity to your 401k plan?

Annuities, which have been around since Roman times, are contracts between you and an annuity issuer. Annuities offer a guaranteed stream of income that can contribute to your peace of mind as you prepare to retire. In exchange for your lump-sum amount or series of payments, annuity owners can get consistent, predictable payouts that last a lifetime.

While the concept of lifetime income you cannot outlive seems simple enough, annuities have evolved into customizable products designed to offer more flexibility. Modern annuities are structured to suit an individual’s financial goals, risk tolerance, and tax situation. However, these powerful and flexible features can also complicate annuity products. 

If your employer offers annuities, you must know about these income products to make informed choices. As is often the case with other 401k options, your employer may not provide the relevant information needed to select the right products for your plan. For this reason, you’ll want advice from an income and retirement specialist to help you discover what works best in your situation.

Also, you should be aware that an employer-sponsored plan might not offer the best annuity selection. As is sometimes the case with mutual funds in 401ks, your employer may have a limited menu of annuity companies and specific products.   Many employer plans offering annuities have only one or two types from which to

choose. None of the selections offered may be the best fit for your circumstances. 

An annuity may also be more costly than other options.  Some annuities, particularly variable annuities,  have additional fees that products without income guarantees typically don’t have.

Potential downsides notwithstanding, there are still many reasons that retirees and pre-retirees might consider purchasing annuities. Seniors may worry about outliving their money and desire the lifetime guaranteed income an annuity can provide. Or, they may want to create legacies for their spouse or other loved ones. Many retirees understand they cannot afford to lose money once they stop getting a paycheck and need to protect their principal investment.

For this reason, before making any decisions regarding your employer plan, I recommend seeking advice from a fiduciary financial advisor.  A fiduciary advisor can review your 401k and help you understand the long-term impact of adding an annuity (or any other financial vehicle) on your retirement. A fiduciary advisor is morally, ethically, and legally obligated to put your interests before their own. Rather than encouraging you to purchase a product just because they receive high commissions, fiduciaries are bound to give you all relevant information and disclose any potential conflicts of interest.    Contact me if you’d like a “second set of eyes” to help you determine your best employer plan choices. I will be happy to review your plan and make suggestions to help you get the most from your contributions.

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