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The Pros and Cons of Offering Your 401K Participants an Annuity Thumbnail

The Pros and Cons of Offering Your 401K Participants an Annuity

Many business owners offer their employees retirement benefits, with 401(k) plans typically being the most popular these days. Traditional 401(k) plans offer a variety of investment opportunities that business owners can provide, with some plans offering the purchase of an annuity, which is another type option for funding retirement. However, while many companies offer retirement benefits to their employees, not many companies offer the purchase of annuities. Continue reading below to learn more about the pros and cons of annuities and whether you should include an annuity option for your employees with a 401(k).

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

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

An annuity could be beneficial for someone who needs a reliable, and steady stream of income throughout retirement. However, annuities are not for everyone as there are certain limitations that make it a less attractive option for some. Before your 401(k) participants decide whether purchasing an annuity is right for them, they will want to discuss this decision in detail with a financial advisor.

Below are some things business owners should 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

However, keep in mind that the more time you plan on spending in retirement, the more money and savings you will need. Individuals who have accumulated a significant amount of wealth may be able to make up for this gap. While others may be better off purchasing an annuity, providing them with a guaranteed stream of income.

Difficult to Transfer

Typically, the transfer of retirement accounts such as 401(k)'s are easy to transfer when an employee leaves a company. This is not the case when talking about annuities as it tends to be difficult to transfer annuities due to the various types of annuity options.

Varying Annuity Types

Like mentioned above, there are a variety of different annuity options. Below is a brief explanation of the four main types of annuities:

  • 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 annuities.

Tax Obligations for Plan Participants

Although annuities help establish a reliable stream of income, one disadvantage of annuities that business owners will want to notify participants about, 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.

Like withdrawing money early from an IRA account, accessing annuity payments early may result in a tax penalty. 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 your employee's  retirement. However, annuities are not for everybody so, determining whether you will want or need an annuity will depend entirely on your personal situation. For those that need a consistent level of income over time and can pay the cost of an annuity may see the benefit in purchasing an annuity. While those that can’t afford it, or have little in savings may consider an alternative retirement option. Keep the advantages and disadvantages of annuities above in mind as you work with your plan provider to discuss incorporating annuities into your retirement plan offerings. If you have any questions about annuities or are having a difficult time deciding if purchasing an annuity is right for you, feel free to reach out to a financial advisor for further assistance. 

  1. https://crr.bc.edu/briefs/what-is-the-average-retirement-age/
  2. https://www.irs.gov/taxtopics/tc410

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.