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In-Plan Annuities Definition
An in-plan annuity is an annuity contract offered within a qualified employer-sponsored retirement plan, such as a 401(k), 403(b), or 457(b) plan. Think of it as adding a "pension-like" option to your existing retirement account.
Instead of withdrawing savings in a lump sum or through systematic withdrawals, participants can choose to convert some or all of their accumulated savings into a stream of guaranteed income in retirement, often for life (or for a specified period).
It's important to differentiate in-plan annuities from annuities purchased outside of a retirement plan. Retail annuities are typically bought directly from insurance companies with after-tax dollars, while in-plan annuities are funded with the pre-tax contributions already held in a 401(k), 403(b), or similar plan. They are offered by insurance companies, purchased directly through your employer's retirement plan.
Key Features:
- Guaranteed Income – Offers predictable, often lifetime income in retirement, backed by the insurance company's ability to pay claims.
- Employer-Sponsored – Included as an option within a qualified retirement plan like a 401(k).
- Tax-Deferred Growth – As with qualified plans, contributions used to purchase a deferred annuity grow tax-deferred until distributions begin.
- Customization Options – Some plans offer flexibility in start date and payout structures.
How Do In-Plan Annuities Work?
In-plan annuities, integrated into workplace retirement accounts, function similarly to traditional retail annuities by allowing participants to allocate a portion of your retirement savings to an annuity contract within your defined contribution plan. Here’s how they work:
- Contributions & Investment: Employees contribute to their 401(k) as usual, with a portion allocated to an annuity option. Immediate annuities are funded with a lump sum amount from your plan assets, typically purchased at retirement.
- Accumulation Phase: During this period, a deferred annuity value may grow tax-deferred based on your plan and selected investment options.
- Conversion: At or near retirement, participants can choose to convert the accumulated annuity value, or a lump sum of assets, into a guaranteed income - depending on the product structure.
- Distribution Phase: You receive a stream of income based on the annuity contract terms - often for life.
What makes in-plan annuities unique is their seamless integration with your existing employer-sponsored retirement plan. You don't have to buy an individual retail annuity contract - everything happens within the familiar framework of your 401(k) or similar plan.
Types of In-Plan Annuities
In-plan annuities are similar to the types of annuities available outside of retirement plans. They can be immediate or deferred, and offer fixed or variable growth, depending on when income starts and how funds accumulate over time.
Immediate Annuities
- Payments begin within 12 months of purchase.
- Often selected at retirement by converting a lump sum into a reliable monthly income stream.
- Income is typically fixed and predictable.
Deferred Annuities
- Start payments at a late date (e.g., age 65, 70, or later).
- During the accumulation period, funds grow tax-deferred - either at a guaranteed rate (fixed rate) or based on investment performance (variable).
- Useful for planning future income needs later in retirement.
Fixed Annuities
- Provide guaranteed, stable growth during the accumulation phase.
- The insurer assumes the investment risk, offering predictable returns regardless of market conditions.
- If annuitized, they typically deliver level income payments for life or a set period, based on the accumulated value.
- Payments typically don't adjust for inflation unless a cost-of-living adjustment rider is added.
Variable Annuities
- Offer market-dependent growth during the accumulation phase. Your account value can rise or fall based on the performance of underlying investments (usually mutual-fund-like subaccounts).
- Potential for higher or lower account values at retirement, affecting your future income options.
- Some contracts include optional riders (for an extra fee) that offer a guaranteed minimum withdrawal benefit or income floor, regardless of market performance.
- Payments typically don't adjust with inflation unless you purchase a cost-of-living rider.
Comparing Annuity Types
| Type | Description | Pros | Cons |
| Immediate Annuity | Starts paying income within 12 months, typically at retirement. | Predictable, stable income that begins right away | Less flexibility, payments are typically locked in once started |
| Deferred Annuity | Income begins at a future date; funds grow during the accumulation phase. | Allows time for growth; may result in higher future income | Income is delayed; subject to product-specific rules or fees |
| Fixed Annuity | Grows at a guaranteed rate during the accumulation phase, offering predictable returns. | Stable, predictable growth; insulated from market downturns | Lower potential returns; may not keep pace with inflation |
| Variable Annuity | Grows based on performance of market-linked investment options (e.g., subaccounts). | Higher growth potential during accumulation; benefits from strong market performance | Market volatility can reduce account value; growth is not guaranteed |
Benefits of In-Plan Annuities
Ensuring financial stability and income throughout retirement is a top priority when planning for retirement. While annuities offer a number of diverse benefits such as unlimited contributions, guaranteed income, and tax advantages; in-plan annuities offer exclusive benefits as part of employer-sponsored retirement plans. From simplified retirement planning to added plan fiduciary vetting - in-plan annuities are a convenient option for retirees looking for security and flexibility.
Potential Downsides of In-Plan Annuities
While in-plan annuity options can help offer retirement security by providing guaranteed income, they also come with limitations that should be carefully considered.
Factors such as liquidity constraints, employer dependency, and the complexity of terms can impact their suitability for some retirees. Understanding these potential trade-offs is essential in deciding whether an in-plan annuity aligns with your retirement goals.
In-Plan Annuities vs. Traditional Retail Annuities
When considering annuities for retirement income, it's important to understand the key differences between in-plan annuities and traditional retail annuities. Below is a comparison of their main features to help you determine which option best suits your financial goals.
| Feature | In-Plan Annuities | Retail Annuities |
| Integration | Purchased from an insurance company directly through a workplace retirement plan | Purchased individually from an insurance company |
| Liquidity | May have limited access once purchased; plan rules apply | Generally more product options; may incur surrender fees |
| Tax Benefits | Tax-deferred growth within a workplace plan | Tax-deferred growth outside employer plans |
| Income Guarantee | Can offer guaranteed lifetime income if you elect annuitization or add an optional rider | Can offer guaranteed lifetime income if you elect annuitization or add an optional rider |
Are In-Plan Annuities Right for You?
In-plan annuities can provide stable, guaranteed income with simplified management, making them well-suited for those who prefer a straightforward, less hands-on approach to their retirement income strategy. However, it's important to carefully evaluate benefits, need for flexibility, and the specific options available in your employer's retirement plan.
Consider In-Plan Annuities If:
✅ You want a reliable income stream in retirement.
✅ You prefer a hands-off approach to managing retirement income.
✅ Your employer offers low-cost annuity options with favorable terms.
Look for Alternatives If:
❌ You need flexible access to your retirement savings.
❌ You prefer self-managed investments with higher return potential.
❌ Your employer’s annuity options come with high fees or limited features.
Conclusion
In-plan annuities are an emerging retirement income solution option that offers stability and longevity protection within employer-sponsored retirement plans. While they can provide guaranteed income and tax advantages, they may not be suitable for everyone. Before deciding, carefully review your employer’s annuity offerings, compare costs and features, and evaluate your financial goals before deciding.
Sources
- 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
- Retirement Confidence Survey - Employee Benefits Research Institute. https://www.ebri.org/retirement/retirement-confidence-survey
