Coming Soon to Your 401(k): Annuities

More employers consider offering an annuity, but are consumers interested?

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Employers are exploring ways to make 401(k)s work a little bit more like traditional pensions. One way to do this is to add an annuity feature to a 401(k) plan that will guarantee payments for life based on the lump sum you accumulate. Almost a quarter (22 percent) of companies already offer an annuity as an option, and another 10 percent of firms are considering adding this option in 2010, according to a recent survey of 149 employers by consulting firm Watson Wyatt.

[See Should You Annuitize Your Retirement Savings?]

“In the recent economic downturn, employees without traditional pension plans could not retire because their 401(k) balances were decimated,” says Robyn Credico, a senior retirement consultant at Watson Wyatt. “With this weakness in 401(k) plans now exposed, more employers are exploring ways to minimize their employees’ exposure to risk, including the use of annuities.”

The Labor and Treasury Departments announced plans earlier this month to examine the 401(k) withdrawal process in 2010. The goal is a cost-effective way to make sure that retirees don’t outlive their savings.

[See Labor Department Examines 401(k) Withdrawals.]

However, annuities have generally remained an unpopular choice among consumers, largely because of the high costs. Only about 7 percent of retirees listed annuities or insurance as a significant part of their retirement income in 2009, according to a Gallup poll conducted in April 2009. That number has remained consistent throughout the decade. Among employers, the primary reasons they did not offer an annuity were a lack of participant demand (56 percent) and administrative complexity (36 percent).