I’ve read a number of stories recently critical of 403(b) retirement plans with annuities—which guarantee lifetime income. These stories typically note how fees in these arrangements “tend to be higher than in 401(k) plans.”
With annuity guarantees, there’s a reason for that.
Predating 401(k)s by two decades, 403(b) plans are named after a Tax Code section that actually has the word “Annuity” in its title. With tax deferred savings and participant directed investments, 403(b) annuities can get confused with 401(k) plans. However, 403(b) annuities offer more than just a way to invest. They provide guaranteed lifetime income in retirement, just like a pension plan.
To simply compare the fees associated with 403(b) annuities to the fees charged by investments such as mutual funds makes no sense. Annuity guarantees are valuable. Providing them comes at a cost. So, it’s not unusual for the fees in a 403(b) annuity to be higher than non-annuity arrangements.
With annuities, retirees receive payments each month contractually guaranteed by the insurer for as long as they live. Most 401(k) plans don’t offer annuity options, leaving retirees instead with a do-it-yourself approach to managing risks such as running out of money in retirement. This may change if the Senate passes the Setting Every Community Up for Retirement Enhancement Act or SECURE. It would make it easier for 401(k) plan sponsors to consider annuities by recognizing the stringent rules in place today that ensure annuity providers are there to make each and every payment.
SECURE will also help retirement plan savers better understand the value of their savings in retirement. With SECURE, savers would see what their account balance would equate to as monthly annuity income. They may learn they need to save more for retirement – valuable education indeed.
Retirees can actively manage their nest eggs and seek to address longevity and investment risks while paying their monthly bills. They can also pay for guaranteed peace of mind and get the monthly check they need to help cover their expenses.
It’s their choice.
Jim Szostek is Vice President & Deputy, Retirement Security at the American Council of Life Insurers (ACLI). He helps guide ACLI policy on legislation and regulations affecting the U.S. retirement system. Prior to joining ACLI in 2008, he held positions at CIGNA and The Hartford.
