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An Idea I Don’t Like: Variable Annuities Inside a 401(k)

By JLP | March 9, 2011

Yesterday’s Wall Street Journal had a special retirement planning section. One of the articles was about using annuities during retirement to boost income and decrease volatility. One of the stable annuities for doing that is a fixed immediate annuity. I don’t have a problem with fixed immediate annuities because they are usually inexpensive, easy to understand and can offer retirees income stability while their other assets are invested more aggressively.

The article also mentions adding a variable annuity to the retirement income mix, adding a rider (for an additional .5% to 1% a year) that gives the annuity holder a set percentage of the original investment, and investing the subaccounts as aggressively as possible since the retiree has the rider. No where does the article is mention surrender periods. I’m skeptical of this idea.

Anyway, the article ends with this paragraph:

Variable annuities are beginning to make an appearance in some 401(k) plans, and Great-West says it has gotten a lot of interest in its 401(k) annuity offering, launched last year.

Great-West is an insurance company. I remember reading not too long ago that people were confused by their 401(k) plans because they offered too many choices. I can’t imagine that offering them a variable annuity is going to make the choices any easier. I also don’t like the fact that Great-West is most likely making a lot more money off the variable annuity than they are the other investment choices. Looks like it could be a conflict of interest.

Thoughts? Do you like variable annuities inside a 401(k)?

NOTE: As is typical whenever I post anything that is skeptical of variable annuities, I’m sure this post will draw the ire of insurance salesmen. I don’t have a problem with you leaving comments that are beneficial. That said, let’s keep it on the mature level.

Topics: 401(k), Retirement Planning | 12 Comments »


12 Responses to “An Idea I Don’t Like: Variable Annuities Inside a 401(k)”

  1. BG Says:
    March 9th, 2011 at 2:05 pm

    I will NEVER do this in my 401-k, if it were to become an option.

    Texas’ state guarantee fund, will only cover $100k if the annuity insurance company goes bankrupt. My 401k is already over that amount.

    Other states have similar limits:

    http://www.annuityadvantage.com/stateguarantee.htm

  2. Evan Says:
    March 9th, 2011 at 2:35 pm

    Disclosure: I work within an insurance company, while licensed to sell VAs I don’t.

    I understand your skepticism, but they are becoming more popular because people are sick of risk and this is just one product that shifts the risk (obviously at a cost) to the insurance company. VAs will generally have a teaser rate that the participant will get regardless of how the market does and that tends to excite people.

    Additionally, some people are at the point where they just want an easy to understand steady stream of income. You can do this with a fixed annuity, but without the possible upside discussed above. Some VAs (less and less at this point) have Riders that guarantee Income benefits or withdrawal benefits – this excites some risk adverse near retirees.

    I don’t own any VAs nor do I have any intention of buying one in the near future (only 29 here).

  3. JLP Says:
    March 9th, 2011 at 2:44 pm

    Evan,

    I appreciate your disclaimer.

    I can think of all kinds of scenarios where the sales person talks up the annuity’s safety features while ignoring the other mutual funds in the plan.

    Part of the risk is not understanding the risk in the first place.

    Yeah, I don’t like this idea at all.

  4. Ben Says:
    March 9th, 2011 at 2:45 pm

    I agree with 401k’s being confusing. where I work we used to only have a few select funds. (all with high expense ratios) Then they decided to add additional funds from that company and then in addition decided to add funds from Fidelity. Yea it’s confusing for anyone and that can lead to the adverse affect of people simply not investing.

    A few choices make it easier but what if those few choices are all horrible choices then you are stuck. 401k’s should offer simple passive funds and then for those who want have additional funds for them.

  5. Joe Lyons Says:
    March 9th, 2011 at 6:15 pm

    I’m a CFP(R) with an insurance license and I have never recommended a VA either inside or outside a 401K. Why wrap mutual funds, with their own set of fees, in another set of fees and commissions? And why insert a tax deferred vehicle insid ea tax deferred vehicle? I don’t know anyone who has gone shoppping for a VA. They are approached and sold VA’s because they generate large commissions. There are so many other ways of mitigating risk, that I see no need for this product.

  6. Evan Says:
    March 9th, 2011 at 9:47 pm

    JLP,

    Not everyone has run a personal finance blog for more than half a decade, so while it seems like an easy decision for you to build a risk-proper 401(k) some people just don’t know how…

  7. DIY Investor Says:
    March 10th, 2011 at 8:45 am

    I have never seen one I felt I completely understood. There are all kinds of hidden costs. They tend to use proprietary funds that you can’t price. The sales people charge outrageous commissions and most can’t even answer basic questions about the product.

  8. Stacey Says:
    March 11th, 2011 at 2:07 am

    The same can be said about my fav ins co where we have our life ins and some of their funds. While I implicitly trust the co, it always irritated me to not be able to price certain funds. For example, in the past I would like to track my $100/mo investment divided among 3 funds, but not so easy to do b/c I didn’t know how many/what price I was investing at. Oh well…for the record we have no annuities. Not ruling them out down the road, but a lot to learn before I put good money down…

  9. Robert Eldridge Says:
    March 11th, 2011 at 3:50 pm

    If your 401K is going to be used in Retirement, why risk any of the principal and gains? I would like to see various indexed annuities approved in these plans. Exchanging various mutual funds for another vehicle that invests in subaccounts (mutual funds)does not make any sense to me.

  10. BG Says:
    March 11th, 2011 at 6:34 pm

    Robert) It’s got to be complicated so that they can skim, heh.

  11. JLP Says:
    March 11th, 2011 at 6:49 pm

    If insurance companies and 401(K) providers wanted to make the 401(K) simpler, they could. They could offer index funds from the major asset classes and show pwople how they work and explain the risks.

  12. Investment Fiduciary Says:
    March 23rd, 2011 at 9:50 pm

    @Evan, I read though a whole variable annuity contract to understand the so called income guarantee. It works like magic … for the insurance company:

    http://investment-fiduciary.com/2011/03/10/variable-annuity-guarantees/

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