Comments on: Annuities in a 401(k)????

By: Mike

Mike — Sat, 21 Feb 2009 19:43:59 +0000

Perhaps these comments should be revisited with the recent market downturn. I wonder if anyone’s conviction on this topic has changed.

By: Kirk

Kirk — Wed, 13 Feb 2008 14:57:29 +0000

Great post and comments. Right on the money. There is no reason to have an annuity in a 401K plan. The extra fees (and surrender fees if an employee leaves or the plan changes before surrender fees are through) kill returns.

If someone wants an annuity at retirement, then they can roll the 401K to a fixed annuity.

This movement is nothing more than the insurance companies trying to justify slamming folks with fees.

By: Foobarista

Foobarista — Tue, 12 Feb 2008 20:23:27 +0000

Another problem is that most people don’t actually retire at their company, so when they liquidate their 401K investments to execute their rollover, I have little doubt that they get screwed by the usual silliness that insurance companies charge when you get out of something.

I’m not normally a big fan of regulation, but few employees and few HR managers have a clue about what constitutes a good 401K plan. And the consequences of a bad 401K plan are profound enough that the taxpayers has a legitimate interest in seeing that they’re done reasonably well.

By: Beyond Paycheck to Paycheck

Beyond Paycheck to Paycheck — Tue, 12 Feb 2008 16:35:33 +0000

Many years ago a magazine cover read “Annuities Suck.” While nothing is ever that clear, holding an annuity within a 401(k) plan is a fairly obvious bad idea. It’s particularly so during the accumulation (saving) phase of life.

All the extra fees are not worth what amounts to redundant tax deferral. Then, consider that the insurance companies would still be happy to annuitize your assets (likely higher, thanks to lower fees and better performance) at retirement. Keep your options open now and pay the least you can for the best expected performance. When you get closer to retirement, reassess. Nothing is locked in.

Well, an annuity with a huge surrender charge might be. Why do they do that? Think about it.

By: Tyler

Tyler — Tue, 12 Feb 2008 16:05:14 +0000

I’ve never been a fan of annuties at all. With the recent market pull-back the insurance companies are simply preying on the fear of the average Joe.
In a properly diviersified portfolio, there is no need to add on the excessive fees of annuties.
I’d prefer to buy great dividend paying stocks while they are on sale and offering above average yields.

By: Ernesto@InsuranceYak.com

Ernesto@InsuranceYak.com — Tue, 12 Feb 2008 15:25:45 +0000

By far the biggest draw of these plans is the guarantee part. In an uncertain world were no portfolio is immune from the whipsawing of the market, a fixed income return makes a nice addition to a diversified portfolio. Putting an annuity inside a 401K is definatly overkill; considering many 401K plans pass on expenses to the participants and then to pay annuity fees on top of that is a little too much. I’d only look at the annuity outside of a 401K plan.

But hey, $100 month is peanuts, if you’re already diversified in stocks, bonds, MMs, Real Estate I’d consider setting this up and letting it grow for 25 years.

Of course I have a insurance license, I could buy this and pay myself a commision..takes care of pesky those fees.

By: Jeremy

Jeremy — Tue, 12 Feb 2008 15:10:39 +0000

I saw a story talking about this in one of the financial trade magazines this month, and it made me stop and think. Clearly, someone can do just as well and structure a portfolio without the annuity and save on some expenses, but the bottom line is that some people (especially some jaded baby boomers) want that guarantee for life. It doesn’t matter that it costs more or the internal rate of return might be lower than they could get by doing something else, but they just want to be guaranteed a monthly check for the rest of their life.

And when there are participants without pensions who are demanding some sort of benefit like this, plan sponsors are going to be more than willing to offer it.

In my opinion, it isn’t the idea of adding an annuity benefit that is the problem, but the implementation of this feature. They are pushing the annuity option as basically one place to put new contributions each paycheck, where it then stays and grows until retirement. Why? Why not let people invest their funds like they normally would without the fees and low returns during their working years and instead offer the option to annuitize their entire, or a portion of their benefit when they retire?

This seems like a win-win to me. The employee benefits from having total control over their investments while working and can then lock in income for life when they retire, and the insurance company still gets their payday in the form of an immediate annuity. Of course, they stand to make less money since they would surely rather collect over 1% each year for 30 years than a one-time 4% or similar fee at the end.

By: Don

Don — Tue, 12 Feb 2008 12:53:21 +0000

Name isn’t everything either. The core investments in a TIAA-CREF account are technically all annuities (variable annuities) which to the casual eye aren’t distinguishable from similarly constituted mutual funds. And they have reasonable expenses, although they have gone up recently because of a bad corporate technology plan.