As Michael Corleone said in the very underrated “The Godfather Part III”, “Just when I want to get out, they keep bringing me back in.”
Since 401(k) plans are not subject to the joint and survivor annuity requirements of the Internal Revenue Code, very few plans offer them. The very few that offer them usually do so because there may be assets in the plan that are subject to the joint and survivor annuity requirements such as assets from a previously merged money purchase plan. When the Internal Revenue Code allowed many of the 401(k) plans that had them (and didn’t have assets from a plan subject to the joint and survivor annuity requirements) to eliminate them without running afoul of the Internal Revenue Code §411(d)(6) anti-cutback rule, many of them did to avoid the added paperwork of purchasing an annuity or having to get a joint and survivor annuity waiver if the participant and spouse wanted another payment option.
There has been a call to add back annuities as an option for 401(k) plans because most plan participants won’t have enough savings to last through retirement if they get a lump sum.
It should be interesting that with the discussion about fee transparency plan sponsors and their financial advisors would consider adding back an option to 401(k) plans that are laden with fees.
I am certainly no annuity expert, it has always been an assumption that the more exotic the features that annuities have, the more fees it has. Just like straight-term policies have lower fees than those term policies with a return of premium. Exotic insurance products come with heavy a premium that is what I always have been taught. So while straight life and joint and survivor annuities should be considered, I am always wary of exotic insurance products such as some of the new retirement plan-centered annuities that are currently being developed.
While the Department of Labor has made it easier for defined contribution plan sponsors to use annuities within their plan, there is still concern about cost and a review of annuity fees would be an added burden for plan sponsors to master.
In addition, plan participants always have the right to pick an annuity upon distribution by rolling over the 401(k) assets into an individual retirement annuity. So the option is always there outside of the plan if it’s not offered within the plan.
While I am not going to state whether I am against annuities within 401(k) plans, I am always cautious about offering insurance products within a retirement plan. So plan sponsors and their advisors should be cautious as well if the benefits of adding an annuity are outweighed by some of the risks.
