Variable Annuity Inside a 401K Plan

[Guest mwalsh17]

In light of the tax deferral already present

in a 401k and the charges for mortality and other fees (in a variable annuity) is it appropriate to include variable annuities as an investment choice in a 401k plan?

[Guest PLHart]

The mortality and expense risk fees within an individual variable annuity product pay for two features not available in most conventional investment vehicles:

1. They guarantee that the participant's beneficiary will receive the greater of the market value of the account or the total premiums paid into the contract at the death of the participant. Many contracts will reset the guaranteed death benefit to the value the account has attained at every third anniversary, and

2. They guarantee that if the participant ever chooses to annuitize at retirement (or any age for that matter), he will be able to do so at the annuity purchase rates that were in effect when his policy was issued, presumably years earlier when life expectancy was less, thus resulting in a more favorable payout then what would be available currently.

So, to answer your question, if these features are valuable to the purchaser of the annuity within the retirement plan, then yes, the fees are appropriate. If the features have no value to the purchaser, then he may wish to look for alternate funding vehicles, if available.

[Guest]

One caution is understanding the type of "variable" annuity that is available. If the plan includes a "group variable annuity", many times these types of contracts carry no mortality expenses. These types of products are offered to lots of 401(k) Plan Sponsors by firms such as Nationwide, Manulife, Aetna, Travelers, Lincoln National....there's just too many to name!

These types of contracts do have fees included in them, such as asset based charges, and so you will still want to do a comparison with these types of investments in comparison to other true "individual variable annuities", or other investments, such as mutual funds.

Individual annuities can be more difficult to administer as well, since each individual participant is issued their own annuity contract. Group variable annuities are typically issued directly to the Plan Sponsor and the insurance company maintains an account in the name of the participant.

When selecting an investment for the benefit of the participants, I believe the Plan Sponsor needs to not only take into consideration the costs of the investments (i.e., individual annuities, group annuities, mutual funds) but must also look at other items such as plan design, ongoing compliance monitoring, and ease of administration. A Plan Sponsor can purchase the least expensive investment vehicle out there, but if the compliance issues and administration of the plan causes more costs and fees to the plan, then everyone loses.

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Carol J. Ringwald

Senior Consultant

Shawmut Consulting Assoc.