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.