Annuities: The next big retirement option?
Companies bid for your business
Other models for turning a 401(k) into an annuity operate outside participating plans. For instance, Hueler Investment Services offers its plan sponsors an annuity purchase platform. Employees of its member companies can post their information on the platform, including their age and amount of savings, and annuity providers bid.
Founder Kelli Hueler says her company's program forces insurers to operate on a level playing field that is transparent and displays costs upfront. It also relieves employers of the concern that they could be considered plan fiduciaries and held responsible for bad investments or failures.
"Participants can put any amount of money there. If they are concerned about outliving their assets, there are plans that will help them. If they are afraid of dying early, we can structure the annuity differently. We put employees in the driver's seat," Hueler says.
Hueler adds that no matter how good she thinks this option is, it can be a tough sell because for so long annuities had a deservedly poor reputation. "So many people have had bad experiences being sold something they didn't need or they were offered something anybody would walk away from," she says.
Needs federal guarantee
Alicia Munnell, director of the Center for Retirement Research at Boston College, says annuities within 401(k) plans won't be widely accepted until the federal government offers some kind of reinsurance. At this point, every state provides some sort of annuity guarantee. Most max out at $250,000. If you have more in an annuity, you risk losing it if an insurer goes belly up.
Munnell believes that's not good enough. "Especially in the wake of the financial crisis, people are skeptical about the health of insurance companies. For this to work, the government has to say it will ensure that your insurance company will be there to pay out the full amount of the annuity."
Checklist of questions to ask
If you are offered one of these plans, be sure to ask these questions, says employee benefits specialist Thomas M. White, a partner with the Rimon law firm in Chicago.
- What insurance company is guaranteeing this plan, and what happens if that company can no longer offer the plan?
- How are the annuity's assets invested? If they are invested in a series of funds, how are the funds selected? How diversified are they?
- What are the costs, and can they be increased in the future?
- Can you borrow against the plan in an emergency?
- What happens if you change jobs? Will the annuity contract be terminated? Will there be a surrender fee, and who will pay it? (Portability -- or lack of it -- could be a big problem with these plans.)
- What if I change my mind about the plan before I retire? Can I move my money to some other investment alternative within the plan?
White says this last question is particularly relevant because an annuity that seems appropriate at age 50 may not be the right choice 15 years later.
As always, the devil is in the details. Don't take anyone's word for how an annuity or a lifetime income option works in your retirement plan. Get benefits information in writing, and if you don't understand it, get an explanation in writing. It's best to corroborate the information with the plan administrator and the plan provider to make sure you have a solid grasp of this complicated product.