Should You Buy an Annuity in Your 401(k)?


At the end of 2019, Congress passed the SECURE Act, which is one of the biggest changes to the U.S. retirement savings policy since 2006. The Act expands retirement savings opportunities and gives retirees greater freedom by expanding access to annuities in 401(k) plans.

Following the passage of the SECURE Act, more 401(k) plans are likely to offer annuities.

Though often put in a bad light, annuities are one of the best ways to guarantee that you don’t outlive your other retirement savings. An annuity guarantees steady income whether you live to 70, 80, 90, or beyond. This protection is priceless.

However, many retirees stray away from annuities because they’re complex and not the easiest to compare. By offering high-value annuity options in 401(k)s, retirees can have more peace of mind during the later years in life.

Annuities make 401(k)s more like a pension

Outside of the government, finding a pension is like finding a needle in a haystack. With the ability to buy an annuity in your 401(k), you’re able to transform your retirement account into a self-funded pension.

Some retirees may choose to buy an annuity when they retire, which enables them to convert their 401(k) balance into a pension-like monthly check. Others may purchase a deferred annuity, which sends monthly payments after a certain date.

Worried about inflation? Looking for longevity protection? Want guaranteed payments no matter how long you live? The right type of annuity can help you achieve just that.

The advantages and disadvantages

There’s a lot to think about when planning for retirement. Before deciding to buy an annuity within your 401(k), consider factors on both side of the equation.

Potential for a higher payoutNo additional benefit to putting tax-deferred 401(k) funds into a tax-deferred annuity
Carefully vetted annuity providerPotential for lower interest rates (money will grow slower than it would investing in ETFs or stocks)
Fees are negotiated by your employer (and should be more reasonable)Funds aren’t left to heirs unless riders are included
Coverage cost is the same for men and womenPayout may be reduced by riders that protect against inflation

The bottom line

With the passage of the SECURE Act, there’s a growing number of plans that offer annuities. The decision to buy an annuity within your 401(k) is a complicated and highly personal one. Talk to a retirement planner and compare the options available to you to figure out what’s best for your golden years.


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