Momentum builds for annuities in 401(k) plans

Employee Benefit Adviser

By Lee Barney

April 1, 2010

More retirement think tanks are getting on board with the idea of including annuities in 401(k) plans, but so far, only a handful of large employers have this as an option.

“They are complicated,” explains Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “And [if] you hand over a bunch of your hard-earned cash and go out on the street and get hit by a bus, it’s gone.”

Furthermore, investors are afraid an insurance carrier could go out of business, and plan sponsors don’t like the administrative headache of switching annuity investments when workers change jobs, added Robyn Credico, a consultant with Towers Watson.

In addition, the Retirement Security Project at Brookings Institution recently spelled out a number of perceived problems with annuities among investors: “Annuities may not inspire confidence because they are not sufficiently transparent or simple to understand. Consumers find themselves mystified by annuities’ complex provisions and worry that insurance companies are pricing their products unfairly. Comparison shopping between annuities, let alone between annuities and lump-sum options, can be a lot more complicated than contrasting a Toyota to a Ford in an automobile showroom.”

Nonetheless, the Obama administration recently came out in favor of annuities, and the Department of Labor and Treasury Department are gathering information on the feasibility of including annuities in 401(k)s.

The 401(k)helpcenter.com, which serves plan sponsors, advocates the creation of a federal insurance fund similar to the FDIC to guarantee annuities.

Meanwhile, The Retirement Security Project recommends either automatic annuitization once workers reach age 45, with the right to opt out, or moving 50% of a worker’s savings into an annuity upon retirement. — By Lee Barney, editor-in-chief, Money Management Executive magazine.