Ten Things Every Employer Should Know Before Switching To An Annuity 401K

1)      A traditional 401k mutual fund charges on average 1.4% for investment management and transaction fees. An annuity plan charges an additional 1.25% - 1.6% for mortality and expense. This means the participants will be paying at least twice the amount that they have been.

2)      The tax deferred benefit of an annuity is negated by using it in a 401k as the 401k is already a tax deferred vehicle.

3)      Most insurers promote their own funds for at least 40% of the investment choices in the plan. This creates another revenue stream for the insurer and usually leads to lack luster performance.

4)      Insurance companies pay from 1% to 7% of the assets in the plan as a commission to the sales person that sells the plan. The salesperson will also receive a .25% yearly trail commission on the assets of the plan. Did the salesperson offer traditional choices to the client or only annuity plans?

5)      Annuity plans typically charge surrender charges for canceling the plan. In the first 5 – 10 years these charges can be as high anywhere from 2% of assets or up to 10% of the preceding 12 months contributions.

6)      A good place to start research is the SEC’s website. The SEC cautions that variable annuities for a 401k should be considered “Only if it makes sense because of the annuities other features such as lifetime income payments or death benefits”.

7)      Concerns about fiduciary responsibility of annuities in 401ks and whether or not they comply with the 404c regulation.

8)      There is no “Pension Benefit Guarantee Corporation” mechanism out there for these products. Of particular concern to many companies is what would happen if the insurer backing up these products went out of business.

9)      Regulations are very unclear about annuities and some aspects of the 401k. Currently, attorneys are on both ends of the spectrum on whether or not an annuity can be used as a QDIA option.

10)  One of the worst annuity plans as to cost is an insurance company that has the initials JH. One of their annuity 401k’s charges 5% of assets and 1.4% annual trail to the selling broker.