Drawbacks to 401k Annuities
Financial services firms that offer 401k annuities believe they’ll become as popular as target retirement funds, which let workers invest in a set portfolio of mutual funds. But before that happens, some wrinkles need to be ironed out.
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.
The fixed index annuity (FIA) is a good choice for the 401(k) annuity program for investors who don’t like risk, because it is linked indirectly with the S&P 500 Index, but without risk to principal, all gains retained and no possibility of loss in a bear market, since it participates only in the upside of the Index. Thus, the investor never has any losses to be made up ( A 30% loss one year requires a 43% gain the next year to break even.) Since the FIA is not a security, stock brokers and bank financial advisors don’t sell it. They market the high-fees, risky variable annuity, which usually decreases in value in a bear market, such as occurred in 2008, when this annuity suffered major losses, all while FIA investors didn’t lose one cent. The FIA also has no up-front sales charge or annual fee, at least the ones I market, so all the client’s money is invested. They can even get a 10-year FIA that provides an immediate 10% bonus on all money put into their account the first five years, plus a % of the Index — hard to beat. They can continue to repeat that by acquiring an identical FIA every five years from separate companies for additional safety and pour as much into it during each five-year segment, all without any risk. That way, they know their money will grow without incident.