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.

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.

One of the issues with buying an annuity at retirement is that employees can’t predict what the interest rate will be at that time, and thus may not get the returns they want. But with some 401k annuities, employees can buy the product at a time when they believe that interest rates are at a peak and set that rate for the term of the contract.

401k annuities can be particularly attractive for employers that want to retain and attract older workers, a more common trend as many anticipate a talent shortage.

Experts agree that the concern around having enough for retirement will grow in coming years, but many are skeptical about whether younger employees will have high demand for 401k annuity products anytime soon.

Their most significant drawback is a lack of portability. Ordinarily, when you change jobs, you can roll money from your former employer’s 401k plan into an individual retirement account, or into your new employer’s 401k plan. But unless your new employer offers the same 401k annuity option as your old one, which is unlikely, you probably won’t be allowed to roll your annuity into your new employer’s plan.

You could leave it in your old employer’s plan, but you wouldn’t be allowed to contribute more money to it, which defeats the benefits of gradually investing over time. And if you want to roll it into an IRA, you might have to cash it out first. That would mean losing the guaranteed income option and the extra fees you paid to get it.

Proponents of 401k annuities contend that this drawback will fade as more plans add annuity options to their lineups. A recent Prudential survey found that 65% of workers ages 21 to 30 favor having part of their savings automatically converted into guaranteed retirement income, and that 70% of workers ages 55 to 64 wish they’d had that option.

If you think you’ll be staying with your employer for several more years, this is less of a concern, and 401k annuities are worth looking into. Interest in this type of product is growing quickly.

Psychologically Easier

Nobody wants to had over a large chunk of their lifetime savings to an insurance company. By letting you contribute small increments over time, 401k annuities help you get over that psychological stumbling block.

Lower Costs

Annuities typically carry high fees to cover investment management, administrative costs and commissions. These fees reduce the amount of income you’ll receive when you retire. Company 401k plans can buy annuities at institutional rates, which means you should get a better deal on annuities from your 401k plan than you can get on your own.

Also, annuities have been getting more expensive because people are living longer. Increased life expectancies have boosted the cost of annuities around 20% over the past two decades. By starting to buy now, you may be paying less that you would when more longevity gains push prices up even more.

Lower Interest-Rate Risk

The more important variable when you buy an annuity is interest rates. The higher the rates are, the greater your eventual income will be. If you buy an annuity when the benchmark interest rate is at, say, 3%, you’ll get a lower monthly payout than if you bought one for the same amount at a 6% rate. But when you invest through a 401k annuity, the price of your annuity will be based on average rates during the period you invest in the option — which could include most of your working lifetime. That reduces the risk of sharp interest-rate fluctuations.

One way around this problem has always been to buy an annuity that provides guaranteed income for the rest of your life. But, handing over a hundred thousand dollars or more of savings to an insurance company is often psychologically impossible to do. When employers offer retiring workers the chance to buy an immediate annuity at retirement, only 1% take them up on it.

Now, some 401k plans are offering a new choice, known as a 401k annuity where workers can invest a portion of their regular 401k contributions in an annuity that will provide guaranteed income after retirement.

With a 401k annuity, you can invest as much as you want each month or each pay period. As an example, a 40-year-old worker who invests $100 a month in Hartford’s Lifetime Income annuity and retires at age 65 would be eligible for $480 a month in guaranteed income for the rest of his life.

Among the current 401k annuity offerings are fixed and variable annuities. Fixed annuities guarantee a specific amount of income per month for life. Variable annuities base the monthly payments you receive on the performance of an underlying portfolio of stocks and bonds.

If you don’t have a traditional pension, and want to guarantee your retirement income, 401k annuities are worth a look. Conveniently, you don’t have to allocate all of your 401k contributions in one place. You can allocate a portion to to a 401k annuity and the rest to your typical 401k options, thus allowing you to reap the benefits of both growth and guaranteed income when it’s time to enjoy retirement.