Table of Contents
As more employers integrate annuities into workplace retirement plans, many investors are wondering:
Are in-plan annuities a smart move for my retirement? These annuities may offer a steady income stream in retirement but also may come with complexities that require careful evaluation.
Understanding how they work, their benefits, and their potential risks will help determine if they align with your long-term financial goals.
What Is an In-Plan Annuity?
An in-plan annuity is an annuity option available within a workplace retirement plan, such as a 401(k) or 403(b). Participants can allocate retirement savings towards an annuity to generate guaranteed lifetime income.
These annuities are designed to help provide guaranteed lifetime income, offering a hedge against longevity risk. They can be immediate or deferred, fixed, or variable, depending on timing and payout.
- Immediate annuities – Payments begin shortly after purchase (typically at or near retirement), with predictable stable income.
- Deferred annuities – Income starts later, providing a longer accumulation period.
- Fixed annuities – Offer predictable, stable income, and fixed rate growth during the accumulation phase.
- Variable annuities – Allow income to fluctuate based on investment performance.
- Indexed annuities – Tie income growth to a market index (like the S&P 500), with more protection than variable annuities, but often limit upside with features like caps and participation rates.
Each type balances income security, growth potential, and risk differently.
Factors to Evaluate
Choosing an in-plan annuity is a major financial decision that requires careful consideration. From understanding different annuity structures to evaluating fees and flexibility, knowing what to look for can help you make an informed choice. Below are the key factors to consider before committing to an in-plan annuity.
- Annuity Type and Structure: Not all in-plan annuities are the same. Identify whether the annuity is immediate or deferred, and whether it's fixed, variable, or indexed to help you understand risk exposure and income predictability.
- Fees and Costs: Review all fees as annuities can include administrative fees, mortality and expense risk charges, investment management fees (for variable), and any optional rider costs. Compare with other retirement investment options before committing.
- Liquidity and Access to Funds: Once annuitized - especially with immediate annuities - access to funds is often irrevocably restricted, meaning you may be unable to withdraw a lump sum if your financial situation changes. Some deferred annuities allow surrender before income starts, but typically with penalties.
- Payout Flexibility: Examine payout options, including whether the annuity allows for spousal benefits, inflation adjustments, or the ability to leave unused funds to heirs. Different annuities offer different levels of payout flexibility.
- Employer Match Impact: Determine whether allocating funds to an annuity affects your employer’s matching contributions or limits other investment choices within your plan.
- Insurer Strength and Reliability: Because annuities are backed by insurers rather than the FDIC, evaluating the financial strength of the issuing insurance company is vital.
- Market and Inflation Protection: While fixed annuities provide stability, they may lose purchasing power over time. Whereas variable and indexed annuities provide more inflation resistance, but add risk. Consider whether riders are available and appropriate.
Pros & Cons of In-Plan Annuities
| Feature | Pros | Cons |
| Income | Lifetime income; Market risk protection; Consistent income stream (for most fixed, indexed, and variable annuities once annuitized). |
Potentially lower returns (for fixed); Income typically does not adjust for inflation unless a rider is selected; Restricted access to principal. |
| Flexibility | Simplified retirement income planning; Integrated with retirement plan. | Often irrevocable once annuitized; Limited flexibility after annuitization. |
| Risk | Helps mitigate longevity and may reduce market risk. Guarantees depend on insurer strength. | Market or inflation risk depending on annuity type (unless a rider is selected). |
| Complexity | Plan sponsor oversight and due diligence; May be easier to navigate vs retail annuities. | Products still vary widely in structure, terms, and riders. |
| Portability | SECURE Act enables some portability if the plan changes. | May not be fully portable if you change jobs and the new employer doesn't accept transfers or offer a compatible option. |
Questions to Consider
Since every retiree's needs, risk tolerance, and financial situation differ, evaluating whether an in-plan annuity option aligns with your long-term goals is essential. To help you make an informed choice, consider these key questions:
Evaluating in-plan annuities requires a personalized approach. Here are some questions to ask yourself:
- What are your retirement income needs? Estimate your retirement expenses and determine how much guaranteed income you'll require. Consider other sources of income, like Social Security.
- What is your risk tolerance? Are you comfortable with market fluctuations, or do you prioritize stability above all else? This will influence your choice between fixed, variable, and indexed annuities.
- What are the fees and expenses? Carefully review the annuity contract for all associated costs, including mortality, expense, administrative, and surrender charges.
- How strong is the insurer? Check the insurer's ratings from independent agencies like Fitch Ratings, A.M. Best, Moody's, and Standard & Poor's.
- What are the payout options? Understand the different ways you can receive your annuity payments (e.g., single life, joint and survivor, period certain). Choose the option that best aligns with your and your spouse's needs.
- Are there any riders available? Riders are optional features that can be added to an annuity contract (often for an additional fee). Common riders include death benefits, inflation protection, and long-term care benefits.
- What are the surrender charges, if any? Know how long you're locked in and what penalties apply for early withdrawals (especially on deferred contracts).
Example:
Sarah, 60, is considering an in-plan fixed annuity offered through her 401(k). She's risk-averse and wants to ensure a stable income stream. She estimates she'll need $3,000 monthly from the annuity to supplement her Social Security benefits.
After reviewing the contract, she finds the fees reasonable, and confirms that the insurance company has a strong financial rating. After careful consideration, she allocates a portion of her 401(k) savings to the in-plan annuity.
Who Should Consider In-Plan Annuities?
Determining whether an in-plan annuity is right for you depends on your financial goals, risk tolerance, and income needs. While these annuities offer a reliable stream of guaranteed income, they may not be the best fit for everyone.
Best Fit:
✔️ Seeking predictable, guaranteed income in retirement.
✔️ Concerned about outliving savings (longevity risk).
✔️ Conservative investors who prioritize stability over growth.
Not Ideal For:
❌ Those wanting full investment flexibility.
❌ Investors comfortable managing their own withdrawal strategy.
❌ Individuals who may need access to capital for large, unforeseen expenses.
Conclusion
In-plan annuities can be a valuable option to consider for retirement income, but they're not a one-size-fits-all solution. Carefully consider your individual needs, risk tolerance, and financial goals along with the type, structure, fees, and long-term impact being offered to you.
Speak with a financial advisor to determine if an in-plan annuity aligns with your overall retirement strategy. We can help.
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
