Continuing last week's theme, mulling the wisdom of adding annuities to 401(k) plans inspired me to put together the following far from comprehensive list of pros and cons.
- Annuity offerings for 401(k) plans tend to be cheaper than individual annuities.
- They are also more flexible than traditional annuities. You can sell out any time without surrender fees.
- Annuities may help retirees manage distributions from 401(k) plans.
- There is a guaranteed payout that lasts for life.
- There may be a death benefit
- Greater choice for plan participants
- Unlike mutual funds, annuity expenses and returns are hard to evaluate and compare. (To see an example of this: Christopher Cordaro, chief investment advisor at RegentAtlantic Capital, says a $100 per month contribution from age 40 to age 65 would be equivalent to receiving 4.5% a year with the MetLife’s Personal Pension Builder and 6% with The Hartford’s Lifetime Income. Meanwhile investing in Vanguard’s Total Bond Market index over the past 10 years has returned 5.7% a year.
- You pay about 1% on top of fees for underlying mutual funds.
- Insurance companies can fail
- No inflation protection
- Would require more education for clients.
- Annuities’ tax deferral advantage is wasted in qualified plans
Poor equity returns over the past decade and excitable markets capable of crashing a thousand points in a day have created a lot of insecurity about investing in stocks. Plan participants also often lack confidence and knowledge about how to allocate 401(k) plan funds, as well as how to withdraw them when they retire. Conservative investors in particular just want some form of guarantee.
Two salient points about that guarantee:
First, clients can get lifetime income more easily and cheaply with immediate annuities.
Second, as Stephen Utkus, principal of Vanguard Center for Retirement Research pointed out in his testimony before the U.S. Department of Labor: “Participants already receive meaningful protection against market and longevity risk from Social Security benefits… They have other ‘annuitized’ wealth in the form of Medicare benefits.”
These existing forms of annuity should not be discounted when discussing this option with your clients.