Buying an Annuity with a 401k

Buying an annuity with a 401k is a topic with much debate.  People in the insurance industry support it with open arms, while the critics consider it a horrible idea and potentially even a scam.

There have even been some warnings about this practice from groups like the NASD and the SEC.  And, insurance firms have already paid large sums to settle class action law suits against them claiming that selling variable annuities in 401k plans is deceptive and un ethical.

But, the fact is, despite what the critics have to say, variable annuity sales are on the rise.  Many peopel feel that variable annuities are being sold more than they are being bought.  Variable annuities, however, may not be a good choice for a 401k.

Sponsors of 401k plans need to know the facts about annuities in 401k plans so they can resist the aggressive pitch of a talented salesman.  If they don’t know the facts, they could suffer a long and expensive relationship.

A variable annuity is half a securities product and half an insurance product.  It’s value will vary depending on the performance of the underlying funds and investments chosen by the owner.   While the funds are being accumulated the investments will grow tax free.

Upon retirement, the owner has the option of annuitizing the funds to receive guaranteed income for a certain period of time, say 25 years, or until they pass away.  As money is removed the gains are taxed as ordinary income.

Variable annuities also provide a death benefit, guaranteeing that if the purchaser of the 401k annuity should pass away before he is able to retire, his beneficiaries will get the base investment or the current value, whichever amount is higher.

When variable annuities are offerred in 401k plans, an insurer is responsible for providing the administrative services and will issue a group annuity policy.  Participants thinking about buying and annuity with a 401k are resposible for selecting their funds in a group of sub-accounts or mutual funds.