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Indexed Annuities Add Value to 401k Plans

Last week, I wrote about an increase in 401k annuity options.  In “A New Role For Indexed Annuities: Inside 401(k)s”, Annuity News’ Linda Koco expands upon this in more detail.  Although annuities have been options in 401k plans since 1999, immediate annuities were typically the only type offered.  Independent broker-dealers usually work with small to medium sized businesses that are open to using annuities in their 401k plans.  Employers appreciate the guaranteed income stream that their employees will receive upon retirement.  They also like that indexed annuities offer the potential for upside growth along with the guaranteed protection of their contributions.  These benefits are great for the employees too, but do them no good if the employer isn’t on board to offer an annuity option.  Indexed annuities can be added to a company’s current 401k plan or they can be an outside plan asset that’s still included in the 401k.  Either way, employees can stay with their current plan and still choose the guaranteed lifetime income that comes with an indexed annuity.

While immediate annuity options inside of 401k plans have been decreasing because of their liquidity drawbacks, indexed and variable annuities within retirement plans are becoming more popular.  Regulatory changes over the past two years have allowed for greater innovation when it comes to offering annuities within 401k plans.  Some large annuity carriers now offer annuities in their employees’ retirement plans, as well as their clients’ plans.  Only 10% of 401k plans currently offer annuity options though.  Variable and indexed annuities with income guarantees are the types of annuities most likely to be included in 401k plans now.  Indexed annuities have the lower costs out of the two options.  Indexed annuities offer employers another option to give their employees.  They have a guaranteed lifetime income benefit and are portable, so they can be taken with an employee who changes jobs.  Choosing an annuity within their retirement plan is optional for employees.  They can also decide how much of their contributions go towards an annuity.

There are certainly many things for employers to consider when offering indexed annuities within their retirement plans.  You have to consider the minimum age for purchasing the annuity, since workers will have a large age range.  Employers don’t want to open themselves up to discrimination if only workers over 50 have the indexed annuity option and the guaranteed retirement income stream.  Also consider that indexed annuities require manual processing, rather than the electronic processing used by some 401k plans.  This doesn’t mean that employers shouldn’t use indexed annuities, but it does mean that some additional planning might be involved.  Most employees choosing an indexed annuity in their 401k plan know that it is a long term commitment.  They want a guaranteed lifetime income stream for their retirement, regardless of who they work for when they actually retire.  But it’s still important to stress the fact that indexed annuities within retirement plans are long term commitments.  Employers need to make sure that their employees are well-informed.  Indexed annuities within 401k plans are beneficial to employees for their guaranteed lifetime income and principal protection.

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