There should be an annuity option in your 401k

Americans lucky to have a pension know the security of a monthly check they can count on. Most Americans can also count on Social Security which is also a form of annuity.

However, the great majority of Americans will be dealing with withdrawals from their IRAs or 401k plans and the variables and decisions that go with them.

Maybe the future will be different. Congress has made it easier with less liability for employer plans to offer an annuity as part of a 401k plan.

Annuities are widely criticized for their cost, but hopefully new products will be developed for 401k plans including the ability to build the annuity over working years through periodic investments within the plan, just like other investment options. There is an understandable reluctance to turn a large chunk of money over to an insurance company, but if the annuity was purchased a bit at a time through payroll deductions, perhaps even using a portion of the employer match, it might be more attractive.

Let’s hope.

Text of the new law:


Section 404 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104) is amended by adding at the end the following:

“(e) Safe Harbor For Annuity Selection.—

“(1) IN GENERAL.—With respect to the selection of an insurer for a guaranteed retirement income contract, the requirements of subsection (a)(1)(B) will be deemed to be satisfied if a fiduciary—

“(A) engages in an objective, thorough, and analytical search for the purpose of identifying insurers from which to purchase such contracts;

“(B) with respect to each insurer identified under subparagraph (A)—

“(i) considers the financial capability of such insurer to satisfy its obligations under the guaranteed retirement income contract; and

“(ii) considers the cost (including fees and commissions) of the guaranteed retirement income contract offered by the insurer in relation to the benefits and product features of the contract and administrative services to be provided under such contract; and

“(C) on the basis of such consideration, concludes that—

“(i) at the time of the selection, the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract; and

“(ii) the relative cost of the selected guaranteed retirement income contract as described in subparagraph (B)(ii) is reasonable.

“(2) FINANCIAL CAPABILITY OF THE INSURER.—A fiduciary will be deemed to satisfy the requirements of paragraphs (1)(B)(i) and (1)(C)(i) if—

“(A) the fiduciary obtains written representations from the insurer that—

“(i) the insurer is licensed to offer guaranteed retirement income contracts;

“(ii) the insurer, at the time of selection and for each of the immediately preceding 7 plan years—

“(I) operates under a certificate of authority from the insurance commissioner of its domiciliary State which has not been revoked or suspended;

“(II) has filed audited financial statements in accordance with the laws of its domiciliary State under applicable statutory accounting principles;

“(III) maintains (and has maintained) reserves which satisfies all the statutory requirements of all States where the insurer does business; and

“(IV) is not operating under an order of supervision, rehabilitation, or liquidation;

“(iii) the insurer undergoes, at least every 5 years, a financial examination (within the meaning of the law of its domiciliary State) by the insurance commissioner of the domiciliary State (or representative, designee, or other party approved by such commissioner); and

“(iv) the insurer will notify the fiduciary of any change in circumstances occurring after the provision of the representations in clauses (i), (ii), and (iii) which would preclude the insurer from making such representations at the time of issuance of the guaranteed retirement income contract; and

“(B) after receiving such representations and as of the time of selection, the fiduciary has not received any notice described in subparagraph (A)(iv) and is in possession of no other information which would cause the fiduciary to question the representations provided.

“(3) NO REQUIREMENT TO SELECT LOWEST COST.—Nothing in this subsection shall be construed to require a fiduciary to select the lowest cost contract. A fiduciary may consider the value of a contract, including features and benefits of the contract and attributes of the insurer (including, without limitation, the insurer’s financial strength) in conjunction with the cost of the contract.


“(A) IN GENERAL.—For purposes of this subsection, the time of selection is—

“(i) the time that the insurer and the contract are selected for distribution of benefits to a specific participant or beneficiary; or

“(ii) if the fiduciary periodically reviews the continuing appropriateness of the conclusion described in paragraph (1)(C) with respect to a selected insurer, taking into account the considerations described in such paragraph, the time that the insurer and the contract are selected to provide benefits at future dates to participants or beneficiaries under the plan.

Nothing in the preceding sentence shall be construed to require the fiduciary to review the appropriateness of a selection after the purchase of a contract for a participant or beneficiary.

“(B) PERIODIC REVIEW.—A fiduciary will be deemed to have conducted the periodic review described in subparagraph (A)(ii) if the fiduciary obtains the written representations described in clauses (i), (ii), and (iii) of paragraph (2)(A) from the insurer on an annual basis, unless the fiduciary receives any notice described in paragraph (2)(A)(iv) or otherwise becomes aware of facts that would cause the fiduciary to question such representations.

“(5) LIMITED LIABILITY.—A fiduciary which satisfies the requirements of this subsection shall not be liable following the distribution of any benefit, or the investment by or on behalf of a participant or beneficiary pursuant to the selected guaranteed retirement income contract, for any losses that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.

“(6) DEFINITIONS.—For purposes of this subsection—

“(A) INSURER.—The term ‘insurer’ means an insurance company, insurance service, or insurance organization, including affiliates of such companies.

“(B) GUARANTEED RETIREMENT INCOME CONTRACT.—The term ‘guaranteed retirement income contract’ means an annuity contract for a fixed term or a contract (or provision or feature thereof) which provides guaranteed benefits annually (or more frequently) for at least the remainder of the life of the participant or the joint lives of the participant and the participant’s designated beneficiary as part of an individual account plan.”.”

One comment

  1. No. In-plan annuities are less cost-effective and more administratively and fiduciary burdensome than other alternatives.

    The better option would be to delay commencement of Social Security until SSNRA or to age 70, using your retirement savings to fill the income “gap” between the day you stop employment and the day you commence Social Security. Middle class Americans won’t find a better priced “additional, guaranteed, inflation-adjusted annuity” than the delay in Social Security commencement.

    Again, here, Congress messed up by making changes in the number of options for commencing payout just a few years ago (the rules are different for anyone born after 1953). However, they didn’t remove the clear advantages of a delay in benefit commencement.

    The in-plan annuity triggers a fiduciary duty (and potential litigation) in the selection of and monitoring of the annuity provider. Monitoring is constant. And, as we have seen in the past, the agencies who write regulations often leave enough grey areas (facts and circumstances requirements) to open the door to future litigation.

    Then, there are fiduciary duties affecting disclosure of the annuity payout. REACT (1984 legislation) mandates the use of the annuity as the payout option (single life annuity for those who are not married on the date of benefit commencement, 50% joint and survivor annuity for those who are married on the date of benefit commencement) unless the participant (and the spouse as well, if married) opt for a different payout option. Yes, the spouse has veto power over the participant’s election. And, who is to say that Congress won’t increase the survivor option to 75% J&S or 100% J&S in the future (they have considered such legislation in the past).

    The in-plan annuity requires the use of unisex factors, which negatively impact the monthly benefit amount payable to male participants; negatively impact the pricing of the survivor benefit for female participants. .

    Finally, one of the best options for using the delay in Social Security to increase your monthly income is that YOU CAN ALWAYS CHANGE YOUR MIND. So, if your circumstances change (death of a spouse, medical issues arise, etc.), you can change your election and commence Social Security. Once you buy a commercial annuity from the insurance company (in plan or outside the plan), you lock in the income stream and any survivor benefits you selected.


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