Should You Offer Your 401(k) Plan Participants an Annuity?

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Many business owners offer retirement options, with 401(k) plans amongst the most popular. Traditional 401(k) plans offer a variety of investment options that business owners can provide, with more plans offering the purchase of an annuity. Read on to learn more about the benefits and drawbacks of annuities and whether you should include an annuity option for your 401(k) plan participants.

How Do Annuities Work in a 401(k) Plan?

Traditional 401(k) plans offer a variety of investment options. Including an annuity within your employer-sponsored plan allows plan participants to purchase an annuity using their 401(k).

An annuity could prove useful to someone who needs a reliable, non-fluctuating stream of income in retirement. There are certain limitations, however, that make it a less attractive option for some. Your participants will want to discuss this decision in detail with a financial planner before deciding whether or not to purchase an annuity.

As a business owner, here are some things to consider when determining whether or not to provide an annuity option for your plan participants. 


The average retirement age is 62 for women and 64 for men. This, combined with an increased life expectancy, means plenty of retirees will enjoy many years of retirement.1

Remember, however, that the more time spent in retirement, the more savings is needed. Individuals who have accumulated a significant amount of wealth may be able to make up for this gap. Others may be better off purchasing an annuity, providing them with guaranteed income.

Difficult to Transfer

When an employee leaves a company, the transfer of their retirement accounts is relatively easy - especially 401(k) accounts. However, since there are various types of annuity products, the transfer of an annuity can be more challenging. This will likely depend upon the type of annuity purchased.

Varying Annuity Types

Amongst annuities, there are multiple products, but four main types to consider. These four types include:

  • Immediate annuities: These begin providing payment immediately after purchase, though the payouts may be a lesser amount than other annuity types.
  • Deferred annuities: These are given time to grow before distributing payments, giving a larger payment amount than immediate annuities. 
  • Fixed annuities: These are typically invested in conservative resources, meaning they tend to focus on reliability over growth. 
  • Variable annuities: These tend to rely on riskier investments, focusing on growth over a guarantee.

It’s important to note that immediate and deferred annuities can be combined with fixed and variable.

Tax Obligations for Plan Participants

Annuities help establish consistent income, but one disadvantage business owners will want to make participants aware of is the potential tax obligation. Annuities are tax-deferred, similar to withdrawals from a traditional IRA or 401(k). But taxes must be paid once payments are received. Unlike some investments that are subject to being taxed based on capital gains, annuity payments are considered regular income for tax purposes.

If plan participants choose to access annuity payments before the age of 59 and a half, they may be subject to an additional 10 percent tax penalty unless certain conditions are met.2

Providing annuity options to your 401(k) plan participants could prove beneficial for their retirement. However, whether they will want or need an annuity will depend entirely on their personal situation. Those that need a consistent level of income over time and can pay the cost of an annuity may see the benefit in utilizing one. While those that can’t afford it, or have little in savings may consider an alternative. Keep the above considerations in mind as you work with your plan provider to discuss incorporating annuities into your retirement plan offerings.


This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.