Your employees may be worried. A January 2023 report by Greenwald Research found that 70% of participants in employer-sponsored retirement plans are concerned about running out of money in their golden years.
In today’s competitive hiring and employee-retention environment, many employers are on the lookout for ways to juice up their benefits packages. One intriguing strategy that may address employees’ fears is adding an annuity as a retirement benefit.
What are they?
Annuities are a type of investment contract issued by insurers that create a guaranteed lifetime income stream in retirement. Traditional annuity contracts require an individual to make either a lump-sum payment or a series of payments to the insurer in exchange for income paid out at regular intervals during retirement.
An alternate version is the qualified employee annuity. This is an annuity bought by an employer for an employee under a plan that meets certain Internal Revenue Code requirements. These annuities are funded with pretax compensation dollars, meaning participants will owe no tax on funds that accrue in the account as long as they don’t make early withdrawals. Qualified annuity distributions taken in retirement, however, are taxable.
How do they differ from 401(k)s?
Annuities and 401(k) plans are similar in that they allow tax-deferred growth of account funds, but they have differences as well — and some of these differences could be selling points. For example, as mentioned, annuities provide for guaranteed payments over the course of the participant’s lifetime in retirement. A 401(k) doesn’t provide this kind of security.
Also, employees can contribute only a specific amount to a 401(k) annually. In 2023, the contribution limit is $22,500. There are no such limits on annuity contributions. Thus, annuity participants could set aside much more money for retirement if they choose and are able to do so.
Are they right for your organization?
Annuities appear to be gaining some ground as an employee benefit — particularly since the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019. The law contains a provision that makes it easier for 401(k) sponsors to offer annuities as a plan option rather than as a separate plan.
However, many employers remain hesitant. A 2023 survey of employers by multinational outsourcing provider Alight found that 47% of respondents expressed concerns about annuities. The unease was mostly related to the complexities and obstacles involved, which include:
- Determining the long-term viability of the insurer providing the annuity; after all, the provider must stay in business over the course of the participant’s lifetime,
- Finding an annuity provider with adequate liability protection, and
- Dealing with the fees involved, which vary by provider/contract and add another layer of complexity to administering annuities when participants leave the organization.
It’s also worth noting that, unlike 401(k) plans, annuities don’t permit participants to borrow money from their accounts. A loan feature is something many people appreciate in case of emergency, despite its downsides.
Worth the risks?
Some of your employees may welcome the idea of reliable, fixed income in retirement that won’t fluctuate based on the investment markets. Then again, the fixed rate of return guaranteed by an annuity may be less than a return they could get from investing. And, also unlike a 401(k) plan, an annuity contract terminates when the account owner dies. So, the person’s heirs get nothing.
Nonetheless, many employers are exploring the concept of adding annuities to their benefits packages. If you’re interested, please contact us for help identifying the costs involved and deciding whether the advantages would likely outweigh the risks.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.