A New Role For Indexed Annuities: Inside 401(k)s


Could an indexed annuity with a guaranteed lifetime income rider become a viable retirement income option inside a 401(k) plan? And can independent agents interest employers in offering these products to employees?

Independent brokerage general agent Jim Pedigo has been researching questions like this for two years and his conclusion is yes.

In fact, he is working on setting up a couple of such cases right now. These will be his first in-plan accounts.

The approach could open up some new opportunities for indexed annuity specialists in the independent distribution channel, said Pedigo, who is a retirement planning consultant with Financial RateWatchers$ in Lake Mary, Fla.

The small to medium-sized size firms that independent agents typically serve do like the idea of having an in-plan annuity option to offer to employees, Pedigo said. He bases that conclusion on his contacts with employers as well as his research.

Employers like the guaranteed income stream the products will provide to plan participants once retired, he said. They like that the annuity accounts will have upside growth potential along with a guaranteed floor during the participants’ working years. And they like that they don’t have to leave their current plans in order to add the option, he said.

“They can either add the indexed annuity to the existing platform, or if that is not allowed, they can make it an outside plan asset that is still a part of the 401(k), in the same way as they might add a real estate investment trust option.”


Offering in-plan annuity options inside of 401(k)s and other defined contribution plans is not new. In-plan annuities have been available at least since 1999, according to a 2012 report from the President’s Council of Economic Advisors. But those products were immediate annuities, Pedigo said, and “their availability inside defined contribution plans has declined over the years, largely due to the liquidity restrictions inherent in immediate annuities.”

The landscape began to change in 2012, however. That’s when the Department of Treasury and the Internal Revenue Service issued a package of proposed regulations and guidance on retirement plans. The documents were designed “to remove impediments and otherwise ease the offering of lifetime income choices that can help retirees manage their savings,” the Treasury Department said at the time.

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That regulatory package has opened the door to innovating new approaches for offering annuities inside of 401(k)s, Pedigo said.

A handful of very large annuity carriers now offer annuities inside plans for their own workers as well as for employer clients. Still, a 2013 survey by Aon Hewitt and cited by Society of Actuaries, found that only 10 percent of employer plans were offering in-plan annuities. “That leaves a lot of room in the market for growth,” Pedigo said.

So far, the annuities being considered for in-plan annuities tend to be variable annuities with income guarantees, or a mixture of variable and indexed annuities having such guarantees, Pedigo said. Of the two, the indexed annuities may have lower costs, depending on policy design, he said. Group annuities with deferred income annuity riders are available too, but he said “they typically don’t offer access to cash values at all times.”

Where’s the fit?

How might the indexed annuity fit into this new world? It provides employers with another annuity option to consider, Pedigo said, referring to individual indexed annuities that are portable, anti-discriminatory, and built with a guaranteed lifetime income benefit.

It’s voluntary, so participants can elect the option at will, and specify what portion of each contribution should go into the annuity. Participants can stop and start this election as they would with any other plan option.

“Due to ERISA requirements, the employer/plan sponsor must be named as owner of plan assets, including any annuities, while the plan participant still works at the firm,” Pedigo said. “But workers who leave the employer can take the annuity with them as an IRA, just as they would other plan assets.” The worker then becomes the owner of annuity, complete with the guaranteed income rider.

The indexed annuity may also have other features, such as care benefit provisions, that provide additional value to the plan participants.


Agents who are interested in offering indexed annuities this way will need to prepare for potential plan-related issues.

For instance, look for indexed annuities that will allow issue ages to younger workers as well as older workers. If the minimum issue age is only, say, 45 or 50, then any workers younger than that would be excluded, inviting potential discrimination issues, Pedigo said. “They would also be delayed from starting to purchase their guaranteed retirement income stream.”

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Some plan administrators may balk at the in-plan indexed annuity option. In one case, Pedigo said, the administrator rejected a plan at the last moment due to concerns about processing. “The administrator was using electronic data transfer for its 401(k) processing. But upon learning that indexed annuities require manual processing, because they typically only provide annual and year-end reports, the administrator said no, we do not want to do the manual processing.”

In such cases, look into hiring an administrator that is willing to do the manual processing, Pedigo suggested. “Manual processing of the annuity could entail additional cost, so consider putting this out to bid and then do cost comparisons. Remember, you can carve out the administration, and it’s not as big a deal as changing the custodian.”

Finally, emphasize that the indexed annuity option is a long-term commitment, for retirement income. Although workers do have access to the funds, he stressed that removing money from the annuity will defeat the purpose. “It will also cost the participant if the surrender charge period has not expired.”

Chances are good that participants who elect an indexed annuity in-plan option are already thinking long-term, Pedigo said. “They will be buying this fixed product option because they want the guaranteed income stream to be there in retirement, whether they stay at the employer or not.”

, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at [email protected].

© Entire contents copyright 2014 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.


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