Are Annuities Appropriate in a 401(k)?

From this information, to qualify under the safe harbor, the plan sponsor must draw the conclusion that the carrier is financially capable and that the contract cost is reasonable — in other words, the plan sponsor must have no reason to believe the representations are false. The plan sponsor must also obtain updated written representations at least once a year.

The plan sponsor must determine that the cost of the annuity option is reasonable in relation to the benefits and features provided by the annuity. There is, however, no requirement that the plan sponsor choose the least expensive annuity option.

Need-to-Know for Employers

Small business clients should be advised about the importance of establishing a process to select annuity providers in compliance with the new Secure Act safe harbor rule. It’s also advisable that plan sponsors and employers use that process to select multiple acceptable annuity carriers — and then establish a process to select the best annuity carrier out of those acceptable annuity providers.

The benefits of an annuity are clear. When the client selects a deferred annuity, the client can take advantage of tax-deferred growth for decades while the annuity contract is in its accumulation phase. If the annuity was purchased with after-tax dollars, only earnings are subject to tax during the decumulation phase.

It’s also important for plan sponsors and participants to remember the importance of maintaining a diversified investment mix within the 401(k). While annuities offered within retirement plans may have lower fees and costs than annuities purchased outside the plan, they shouldn’t be the participant’s only investment. Participants should also be reminded about the importance of using their long-term retirement investment to take advantage of more aggressive investment options, especially at younger ages.

Conclusion

While an in-plan annuity won’t be the key to every client’s lifetime income needs, giving participants the opportunity to purchase an annuity with retirement dollars can provide more clients with access to these valuable financial products. With the pandemic-related challenges faced by employers waning, now may be the perfect time to revisit the post-Secure Act annuity option.