Annuities in 401(k)s

Purchasing Annuities in 401(k)s

Advantages of Converting 401(k) to Annuities

Benefits

Converting 401(k) to annuities has several benefits. A major advantage is that payouts may be higher. Also, fees for the annuity may be reduced because they are employer-negotiated.

Payouts

Annual payouts can be higher through 401(k)s because insurers can save money on marketing when they have a large pool of employer-led leads. But don’t automatically assume the payouts are better without reviewing what outside annuities can offer.

Other Options

Finally, there is an advanced deferred annuity funded by an investment from a retirement plan. This is called the qualified extended annuity contract (QLAC). As of January 1, 2021, an individual can use up to $135,000 from their retirement savings account to purchase QLAC.

Fixed Income

Annuities vary, there are many that provide fixed income for life. With some, you can specify how long you want to continue receiving payments. The security of knowing exactly how much to expect from one source of income can provide peace of mind in retirement.  


If you select a straight life fixed annuity, it’ll pay you a fixed amount until death but have no benefits for survivors. This is a great option if you’re mainly concerned about fully funding your own retirement accounts.  

Survivors

Another option is a joint life with last survivor annuity which costs more, but provides for a surviving spouse. This fixed income for life is ideal for couples needing to provide fully for both people. See more below.

Bottom Line

Consider All Options

Few 401(k) plans offer annuities today, and even when they do, either employees often don’t know about them or the options are very limited. Whether or not to purchase an annuity within a 401(k) is a complex decision that can have a major impact on your retirement. It’s very personal, and what your colleague is doing or what your HR representative thinks looks right may not be the right choice for you. It is important to know all the facts and compare your options to make the right decision. Reach out to Bobby M. Collins for any questions.

Security

Plan sponsors have certain obligations to members under the Employee Retirement Income Security Act (ERISA).

So it would be natural to assume that if your plan sponsor offered an annuity in your 401(k), it was probably considered a solid choice that would deliver on its promise, and will not defraud you with unreasonable fees. 

As you might already know, an annuity is a financial contract between you and an insurance company that guarantees you a fixed monthly income for the rest of your life. This means that even if this month's grocery bill is higher than last year's, or you have unexpected medical bills that eat into your budget, you'll still get the same amount of money every month—no matter what.

Types of Annuities Allowed in 401(k) Plans 

Types

Companies who administer 401(k)s such as Fidelity Investments, do indeed offer annuities to their clients. However, the choice is severely limited. I believe the only one available is SPIA (Single Premium Immediate Annuity).

Considerations

Here’s how they work. When purchased, you agree to lifetime income for a certain period, such as for ten or fifteen years. Let’s say I put all my retirement funds in this product and I receive a monthly check from the annuity company and have been doing so for ten years. If I die, the money left in my account will NOT be passed on to my heirs; the annuity company keeps it. The reason why is because I would have used up my protection living for more than ten years. Or, if I had a fifteen-year annuity and I died in year ten, my heirs would receive the monthly checks for another five years, and the company keeps the rest. 

This will not fit most retirees’ needs.

Security

Make sure the insurance company offering the annuity has solid financial strength ratings from rating agencies like AM Best. And check out how annuity fees and payments compare to available annuities outside of your 401(k).

Other Options

Finally, there is an advanced deferred annuity funded by an investment from a retirement plan. This is called the qualified extended annuity contract (QLAC). As of January 1, 2021, an individual can use up to $135,000 from their retirement savings account to purchase QLAC.

Fixed Income

Annuities vary, there are many that provide fixed income for life. With some, you can specify how long you want to continue receiving payments. The security of knowing exactly how much to expect from one source of income can provide peace of mind in retirement.  


If you select a straight life fixed annuity, it’ll pay you a fixed amount until death but have no benefits for survivors. This is a great option if you’re mainly concerned about fully funding your own retirement accounts.  

Survivors

Another option is a joint life with last survivor annuity which costs more, but provides for a surviving spouse. This fixed income for life is ideal for couples needing to provide fully for both people. See more below.

Bottom Line

Consider All Options

Few 401(k) plans offer annuities today, and even when they do, either employees often don’t know about them or the options are very limited. Whether or not to purchase an annuity within a 401(k) is a complex decision that can have a major impact on your retirement. It’s very personal, and what your colleague is doing or what your HR representative thinks looks right may not be the right choice for you. It is important to know all the facts and compare your options to make the right decision. Reach out to Bobby M. Collins for any questions.