More employers are expected to offer annuities to workers participating in their 401(k) plans, according to new research.
The interest is driven by employers looking for ways to provide workers with a steady distribution of benefits during retirement, according to the study by Watson Wyatt, a consulting firm that advises many US pension plans.
The findings follows an announcement by the Department of Labor in late 2009 that it will explore steps to encourage employers to offer lifetime annuities or similar lifetime distribution options in their defined contribution (DC) plans. Annuities provide investors a sum of income paid at regular intervals, often annually.
Nearly one in four employers that sponsor DC plans currently offer an annuity as a distribution option, and 10 percent of those who don't offer one are considering adding it.
While annuities in 401(k) plans were rarely discussed a few years ago, employers are more interested due to the recent economic downturn. That's because many employees without traditional pension plans couldn't retire because their 401(k) balances were decimated.
"With this weakness in 401(k) plans now exposed, more employers are exploring ways to minimize their employees' exposure to risk - including the use of annuities," said Robyn Credico, a senior retirement consultant at Watson Wyatt, which based its finding on a survey of 149 employers.
The main reasons plan sponsors didn't offer an annuity in the past were a lack of participant demand and administrative complexity.
Annuities are contracts investors set up with insurance companies, providing a guaranteed source of income during retirement. The payout can be guaranteed for a set amount or of time - say 10 years - or for the lifetime of the investor.
There are two basic types of annuities: fixed and variable - each of which can be very complex. But now that many employers have frozen their traditional pension plans, and Social Security's future remains cloudy, some investors are looking for more stability in their portfolio.
There can be pros and cons for individuals, so people interested in annuities are generally advised to speak with a financial planner before buying into a plan.
"Managing lump sums is a huge challenge - even for experienced investors," said Mark Warshawsky, director of retirement research at Watson Wyatt. "Given last year's steep decline in retirement savings, employers can expect employee attitudes toward annuities to shift, as perceptions of risk are heightened."
Some of these annuity investment options are available to younger employees while they are still employed and contributing to their 401(k) plans, while others are available at the time of retirement.