Sometimes more isn’t better. If the SECURE Act is passed by the Senate, 401(k) providers would be required to offer annuities in their retirement plans, meaning you’ll have more annuity options.
While some 401(k) plans already have annuities, the SECURE (Setting Every Community Up for Retirement Enhancement) Act would eliminate some liability for employers who add them.
You likely have two questions. What the heck is an annuity, and should one be in my 401(k)?
An annuity is a contract. An insurance company makes a series of income payments for a specified time in return for a premium or premiums you have paid. “There are many variations of annuities, but the primary income function is that investors get paid as long as the contract is in force. This reduces the risk of them outliving their money,” says Steven Nuckols, founder of Wealth Compass Financial in Carlsbad, California.
Sounds good, but annuities are complex. Mark Anthony Grimaldi, author of "RetireSmart!," doesn’t mince words, “Other than the monthly income, withdrawals are not allowed from the annuity. The monthly payment is fixed, so inflation could erode your purchasing power. The security of your income is only as good as the insurance company that issues it.”
Then there’s the cost. “They can be incredibly expensive. Depending on the duration, it could also have a steep surrender charge,” says Matthew Schechner, president of Essential Advisory Services in Westbury.
If an annuity is in a 401(k), what would portability look like? “Having annuity options in 401(k) plans is an interesting concept, but it hasn’t been fully developed," Schechner said. "I recommend people wait and see how it pans out first.”