401k Annuities Gaining Popularity

People are always looking for safer investment options that lower the risk of outliving their retirement savings. While owning a diversified portfolio is a good long-term strategy, workers worry that market volatility like the dot.com bust will damage their nest eggs.

It’s especially true for older workers who don’t have enough time to recover from dropping markets and for those who don’t have a pension plan to go with their 401k plan.

Now, stable, old fashioned annuities are coming to your 401k. The move to include these annuities is part of a larger trend in which employers are offering options of greater stability.

In a 401k annuity, workers contribute pretax dollars each pay period. The payout at retirement is based on a formula that takes into account factors such as age, interest rates and total amount of contributions. Some annuities also have features to protect against inflation and provide survivor benefits.

401k annuities guarantee a steady income stream after retirement, no matter what happens to the stock and bond markets. And, buying an annuity inside a 401k is much cheaper than buying one outside the plan because there are no commissions to a financial planner or insurance agent. Lack of portability, however, is a disadvantage. If you switch jobs, it’ll most likely be tough to find an equivalent annuity in your new company’s plan.

Right now, only about 50 companies offer annuities in their 401k options, but look for most to do so within the next decade. Workers want them, and employers will be at a competitive disadvantage if they don’t provide them.