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In-Plan Annuities Defined
In-plan annuities are annuity plans integrated within an employer-sponsored defined contribution plan, such as a 401(k) or 403(b). They allow participants to allocate part of their retirement savings into a guaranteed income stream. These can be either immediate (payments begin soon after retirement) or deferred (payments start later). The annuities may be fixed (providing stable payouts), variable (based on market performance), or indexed (linked to a market index with a cap and floor). In each case, they help address longevity risk by offering income for life.
The Role of In-Plan Annuities in Retirement Security
Adding an annuity option to your plan can help to create a more secure retirement by providing predictable income and reducing some investment risks. Here’s how they can enhance retirement security:
- Providing Predictable Income: Securing a steady income stream is a major challenge in retirement. In-plan annuities provide guaranteed periodic payouts, simplifying budgeting and financial strategy for retirees.
- Reducing Longevity Risk: All lifetime annuities share the goal of helping to protect against outliving your savings, regardless of payment type.
- Mitigating Market Volatility: Fixed and some indexed annuities reduce exposure to market downturns. Variable annuities still carry market risk but offer upside potential.
- Encouraging Better Retirement Planning: By incorporating annuities into a retirement plan, individuals are more likely to think strategically about their long-term financial security rather than focusing solely on accumulation.
- Vetting By Plan Fiduciary: Employers are required to carefully review and offer only competitive products from insurance companies with solid financial strength vs buying retail annuities on your own. The issuing insurance company is solely responsible for its payouts.
Key Benefits of In-Plan Annuities
1. Guaranteed Lifetime Income
An in-plan annuity can convert a portion of your retirement savings into lifetime income. The exact payment structure depends on the type (fixed, variable, or indexed) and timing (immediate vs. deferred).
- Example: At age 65, Carol allocates a $250,000 transfer from her 401(k) to an immediate fixed in-plan annuity. With income payouts beginning in month 1, Carol is expected to receive approximately $1,500 per month (or around $18,000 annually), depending on contract terms and assuming consistent payments for life. Example is for hypothetical and for illustrative purposes only.
2. Simplified Retirement Planning
Since in-plan annuities can be purchased directly within your existing retirement plan, they eliminate the need to shop externally or coordinate between accounts. They can integrate seamlessly into your investment portfolio and help to simplify your decision-making.
3. Protection Against Market Volatility
Fixed and some indexed annuities offer downside protection.
Market Volatility Worries Retirees
4. Tax Advantages
In-plan deferred annuities offer the same tax-deferred growth as other 401(k)/403(b) investments. Distributions are taxed as ordinary income upon withdrawal.
5. Employer-Sponsored Confidence
Because these annuities are vetted and offered through the plan fiduciary, employees can feel more confident in their choices.
6. Potential for Inflation Security
Certain in-plan annuities may offer inflation adjustments—though often at an additional cost.
Potential Drawbacks of In-Plan Annuities
While in-plan annuities offer numerous advantages, it's also important to consider potential drawbacks.
1. Limited Flexibility
Once you purchase an in-plan annuity, your money is locked into the contract, meaning you may not have access to funds for unexpected expenses. Some deferred products offer accumulation flexibility but may still restrict liquidity.
2. Lower Growth Potential
Fixed annuities, regardless of whether or not they are part of an employer-sponsored defined contribution plan, trade growth potential for income stability. Variable annuities may offer growth, but with corresponding risk.
3. Potential Fees and Surrender Charges
Both retail and in-plan annuities may include fees, particularly for added benefits or early withdrawals.
4. Dependence on Employer Plan Options
Your annuity choices may be limited to a few providers and products selected by your employer’s plan, potentially restricting access to better or more competitive options available in the open market.
5. Inflation Risk
Without inflation protection, fixed payments may lose purchasing power over time. Inflation-adjusted options may reduce initial income levels.
Conclusion
In-plan annuities can be a strategic way to turn part of your retirement savings into lifetime income. When aligned with your goals, they offer stability, predictability, and integration with your existing retirement plan - making them a strategic addition to your retirement portfolio. However, it’s essential to consider the type of annuity, your need for flexibility, and whether inflation protection is important to you.
Talk to your employer or plan provider to see if in-plan annuities are available and consult a financial advisor to determine if they align with your retirement income strategy. Your employer or plan provider can share more details. Consider speaking with a financial advisor to determine if in-plan annuities align with your retirement income strategy.
Source
- 2024 Retirement Confidence Survey - Employee Benefit Research Institute. https://www.ebri.org/retirement/retirement-confidence-survey
- H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019 - U.S. Congress. https://www.congress.gov/bill/116th-congress/house-bill/1994/text
- H.R.2954 - Securing a Strong Retirement Act of 2022 - U.S. Congress. https://www.congress.gov/bill/117th-congress/house-bill/2954/text
- In-Plan Annuities: The Plan Sponsor Perspective - LIMRA. https://www.limra.com/siteassets/research/research-abstracts/2023/in-plan-annuities-the-plan-sponsor-perspective/in-plan-annuities-the-plan-sponsor-perspective.pdf
