How to Incorporate In-Plan Annuities Into Your Retirement Strategy

Annuities offered within employer retirement savings plans can transform the way you look at your retirement savings by providing access to income for life through annuitization, backed by the claims-paying ability of the issuing insurer. They’re becoming more accessible through employer-sponsored plans, offering a built-in way to address longevity risk. This article explores how you can incorporate them into your overall retirement strategy.

The Growing Relevance of In-Plan Annuities

Retirement planning is no longer just about how much you save - it's about how effectively you can convert that savings into income that can last a lifetime.

In-plan annuities are options embedded in employer-sponsored retirement plans, such as a 401(k) or 403(b), and provide a lifetime income stream once you retire. They allow participants to use a portion of their retirement balance to purchase a stream of guaranteed income, either starting at retirement or later in life.

While not exactly like traditional pensions, in-plan annuities can function similarly by providing dependable monthly payments. This steady income can help reduce the stress of managing market volatility and withdrawal strategies in retirement.

Benefits of In-Plan Annuities

• Lifetime Income: Payments can be structured to last for life.
• Employer-Sponsored: Offered through your retirement plan provider.
• Income Protection: Depending on the annuity type, may offer protection against market downturns or longevity risk.
• Regulated and Transparent: Fees, terms, and structures are governed by plan rules and insurance contracts.

Why In-Plan Annuities Are Gaining Momentum

For decades, pensions provided a guaranteed paycheck for life. But as pensions faded from the private sector, retirees had to piece together income sources on their own. The appeal of in-plan annuities is that they bring some of that structured income similar to a pension back into the spotlight.

The Role of the SECURE Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act paved the way for more widespread adoption of in-plan annuities. The SECURE Act and SECURE 2.0 legislation encouraged adoption by shielding employers from certain fiduciary liabilities and expanding flexibility in lifetime income options. It offered legal and regulatory frameworks that made it easier for plan sponsors to include these options.

Three Drivers of Popularity

1. Longer Lifespans: As average life expectancy rises, the risk of outliving retirement savings becomes more real.
2. Simplified Access: When annuities are built into a retirement plan, navigating the complex annuity market and enrollment are much easier compared to going outside your plan.
3. Employer Endorsement: Knowing that your employer has reviewed the provider and annuity offering can provide an extra layer of confidence.

Anatomy of an In-Plan Annuity

In-plan annuities are often structured as part of a target-date fund or as a standalone investment option within your retirement plan. Generally, you allocate a portion of your contributions to the annuity option, either over time during your working years or at the point of retirement.

At retirement—or at a date you choose, depending on the product—you can convert either a portion, or the balance, of your account into an income stream that can be guaranteed by the insurer, either immediately or at a deferred future date.

Types of In-Plan Annuities

It's important to understand two main dimensions of annuities - when the income starts (immediate vs deferred) and how the interest is credited in the accumulations (growth) stage of the contract (fixed, variable, or indexed).

• Immediate In-Plan Annuities: Start paying guaranteed income shortly after retirement - typically within 12 months - offering quick access to consistent monthly payments.
• Deferred Income Annuities: Purchased earlier in your career or at retirement, but income begins later (e.g., at age 65 or 70). These allow for accumulation over time, often resulting in higher income amounts than immediate annuities. 
• Fixed In-Plan Annuities: Grow at a guaranteed interest rate during the accumulation phase, regardless of market conditions. Offer stability and protection from downside risk.
• Variable In-Plan Annuities: Grow based on the performance of market-linked investment options (like mutual-fund-style subaccounts). This creates the potential for greater accumulation - but also greater risk. Income payments are typically consistent once started.
• Indexed In-Plan Annuities: Link accumulation growth to the performance of a market index (e.g., S&P 500), often with caps and floors to limit both upside and downside. Provide a balance of opportunity and protection. Income payments are usually steady unless modified by an elected rider.

How to Incorporate In-Plan Annuities Into Your Retirement Strategy

To get the most of in-plan annuities, start by clearly understanding your overall financial picture. It’s not just about plugging in an annuity wherever it fits. Instead, approach it holistically, balancing liquidity, growth potential, and guaranteed income.

Step 1: Assess Your Retirement Needs

Determine your estimated retirement expenses, factoring in inflation, healthcare costs, and your desired lifestyle. Then, calculate your projected income from Social Security, pensions, and other sources. This will help you identify any potential income gaps.

Example: Suppose you plan to retire at 65 and expect monthly expenses of $4,500. If Social Security covers $2,000, you’d need an additional $2,500 from your retirement accounts or other sources. An in-plan annuity could be structured to supply a portion of that gap.

Step 2: Review Your Plan Documents:

Carefully examine your employer-sponsored retirement plan documents to understand the available in-plan annuity options that are available to you.

• Eligibility and Timing: When are you eligible, and how can you annuitize?
• Available Options: Which types are offered (single-life, joint-life, inflation-adjusted, etc.)? What are the payouts?
• Fees and Expenses: What are the administrative and insurance-related costs?
• Insurance Provider: Who is the insurance company backing the annuity?
• Deferral Choices: Are you able to defer the start of income payments to a later date? What options exist for beginning your annuity income stream, and how does timing affect payout amounts?

Step 3: Consider Your Risk Tolerance

Do you prefer the certainty of guaranteed growth, or are you comfortable taking on some market risk in exchange for the potential to grow your savings more before retirement? Your comfort with investment risk during the accumulation phase will help determine whether a fixed, variable, or indexed in-plan annuity may be right for you.

Regardless of the type you choose, income payments are typically consistent once they begin, unless you select a rider that adjusts them (such as for inflation).

Step 4: Estimate Your Annuity Payout

Use online calculators or consult with a financial advisor to estimate the potential income stream you could receive from an in-plan annuity based on your current savings and projected retirement age. Deferred annuities may offer higher payouts than immediate annuities due to the delayed start.

Step 5: Compare with Other Options

Don't assume that an in-plan annuity is automatically the best choice. Compare it with other potential strategies, such as:

• Systematic Withdrawals: Drawing down your retirement savings gradually.
• Purchasing a Retail Annuity: Exploring options outside your employer's plan.
• Investing in a Diversified Portfolio: Maintaining a mix of stocks, bonds, and other assets.

Step 6: Determine the Right Allocation

If you decide to incorporate an in-plan annuity, determine what percentage of your retirement savings you will allocate to it. There is no one-size-fits-all answer, it depends on your individual circumstances and risk tolerance.

Step 7: Make a Decision and Implement

Once you've decided, follow your plan's procedures to allocate funds to the annuity. 

Step 8: Monitor and Review

Life changes. Revisit your strategy and annuity allocation regularly to ensure it still meets your needs.

Additional Considerations

Tax Implications

Money in your 401(k), including any portion allocated to an in-plan deferred annuity, typically grows tax-deferred. Once you begin taking withdrawals in retirement, the income is taxed as ordinary income. If you access funds before age 59½, you may be subject to an early withdrawal penalty unless an IRS exception applies.

Spousal Benefits

Many in-plan annuities allow you to choose a joint and survivor annuity, which continues to pay full or partial income to your spouse after your death. This can be a valuable estate and income-planning tool, but it’s wise to confirm the available options and details with your plan administrator so you understand how this choice impacts your payout.

Employer Match Considerations

Some employers might match contributions to any investment option in your plan, while others might restrict the match to only certain types of funds. Check your plan’s rules to ensure you don’t miss out by over-allocating to the annuity early on.

Conclusion

In-plan annuities offer a structured, reliable way to create lifetime incomes from your retirement savings. With proper planning and understanding of the different types available, you can build a retirement strategy that balances security, flexibility, and growth potential.

Speak with a financial advisor to explore how an in-plan annuity option fits into your retirement plan. We can help..

Source

1. 2024 Retirement Confidence Survey - Employee Benefit Research Institute. https://www.ebri.org/retirement/retirement-confidence-survey
2. 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
3. H.R.2954 - Securing a Strong Retirement Act of 2022 - U.S. Congress. https://www.congress.gov/bill/117th-congress/house-bill/2954/text
4. 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