Don’t let annuity ‘myths’ block their adoption

Americans know they need to save for retirement. What they often don’t know is how to manage those savings once they reach retirement.

Employers and policymakers had been laser-focused on getting people to save in defined-contribution plans as the era of pension plans waned. But the problem of creating income from their savings wasn’t addressed until the SECURE Act of 2019, which removed regulatory hurdles to including annuities in DC plans and improved portability. 

The pace of change is remarkable — 80% of employers that don’t already include an annuity in their DC plan say they plan to offer one, and more than half plan to do so in the next two years, according to a 2024 TIAA survey of 500 decision-makers at institutions across 17 industries. 

Employees like the idea of guaranteed income as well. More than 60% of people over the age of 50 surveyed by AARP say they worry they won’t have enough money to live on in retirement; meanwhile, retail annuity sales have hit record highs four years in a row. The appetite for in-plan annuities is strong: According to the Employee Benefit Research Institute, one-third of employees ranked “investment options that provide guaranteed lifetime income” as No. 1 on a list of valuable potential improvements to their retirement plan.

Yet many employers — and employees — still struggle with “annuity fluency.” TIAA research found nearly two-thirds (63%) of sponsors said they can’t articulate the value and importance of annuities, and that lack of understanding is the No. 1 barrier to adoption (43%).

So let’s tackle the biggest myths and misunderstandings.

Myth 1: Annuities are complicated.

Retail annuities — those sold directly to individuals through a company or a financial advisor — are highly customizable and, as a result, can be complicated. In-plan annuities, however, are a different story. Like group health insurance offered via an employer, in-plan annuities streamline the offering to include common options (such as being able to have a spouse receive payouts after the primary annuitant’s death). There are also the benefits of group pooling of risk and an evaluation process that meets fiduciary standards, easing the confusion and complexity for employees.

When annuities are embedded in a target-date portfolio, they get even easier to understand. More than 80% of employees leave their money in the default investment option. Including an annuity ensures they have a guaranteed asset class that will never go down in value while they save and easy access to a guaranteed income stream when they retire. This reduces the behavioral friction people encounter when they are about to retire and realize the challenge of managing an income-generating portfolio over the next 30 years.

Myth 2: Annuities are expensive 

Again, retail annuities can sometimes be expensive. Salespeople collect a commission for their effort, and buyers often pay more for riders that allow greater customization or protection. Employers choosing an in-plan annuity, however, have greater negotiating and purchasing power and the ability to efficiently price the risk of their entire pool of annuitants. 

Fixed annuities offered inside retirement plans typically do not have an explicit expense ratio. The insurer offers a crediting rate it can guarantee, but there is no ongoing management fee. In-plan annuities also typically come with no commissions and more-lenient surrender provisions. 

Despite these facts, retail annuities are popular. According to LIMRA and Morningstar, $385 billion in retail annuities were sold in 2023 — and 56% of those dollars came from qualified retirement plans and the average expense was 2.47%. Those people may have been better served with an institutionally priced in-plan annuity.

Myth 3: Annuities require giving up control.

What people tend to focus on here is a perceived lack of liquidity — the inability to access their money.

Depending on the type of contract, employee money in certain in-plan annuities can be transferred easily. 

This crediting rate is a key benefit in the savings years. In addition to delivering retirement income, fixed annuities provide a valuable portfolio diversification benefit: They are guaranteed not to decrease in value, and they pay a set crediting rate, which means they can help stabilize portfolios in ways mutual funds and other investments cannot. Embedding liquid annuities in target date funds allows the appropriate allocation to this guaranteed asset class to change over time and provides that stabilization when people need it most — near and at retirement. 

When it comes time to annuitize and collect that guaranteed income, there is a trade with the insurance company — the annuity holder provides a lump sum and the insurance company provides income guaranteed to last the holder’s entire life, perhaps longer. This normally applies to just a portion of assets, depending on income needs and expected Social Security income. That means employees retain a significant portion of their savings to invest however they choose to help meet variable expenses. 

Myth 4: The “4% rule” is all anyone needs

Nobel Prize-winning economist Bill Sharpe noted retirement income as the “nastiest, hardest problem in finance.” Under the 4% rule, you withdraw 4% of your savings your first year in retirement, then adjust that dollar figure every year for inflation. 

But the 4% rule is just a starting point and isn’t right for everyone. It’s especially problematic in volatile markets or periods of high inflation, which increase the risk of running out of money. 

Annuitizing a portion of retirement savings can reduce the uncertainty and stress that accompany monitoring the markets while also guaranteeing income.

2025 Research by TIAA demonstrates the advantage. Each year TIAA calculates the difference between what a 67-year-old retiree can withdraw in their first year of retirement using the 4% rule versus what they could draw if they annuitized a third of their savings with the TIAA traditional fixed annuity. This year, a worker could get 33% more income if they annuitize than if they used the 4% withdrawal rule alone. On $1 million saved, the strategy yields $13,154 more income in 2025 — guaranteed. 

Myth 5: When an annuitant dies, the heirs receive nothing

Like defined benefit pensions, in-plan annuities offer options for continued payments to beneficiaries as well as provide payments for a guaranteed period (i.e., 10, 15, 20 years) regardless of when the annuitant dies. Instead of the separate fee that a retail annuity would assess, an in-plan annuity will typically offer a slightly lower payout rate in exchange for this kind of guarantee. 

What’s more, if the retiree’s fixed expenses are largely covered by Social Security and an annuity, the rest of the portfolio can be invested more aggressively, with an eye toward growing a legacy. 

Demand for in-plan annuities is growing from both employers and employees as we move into a new era of retirement. People are living longer, healthier lives and spending more time in retirement. Employers hold more sway over the future of retirement than perhaps any other institution. Let’s work together to improve financial security for tomorrow’s retirees.

Timothy Pitney is head of lifetime income distribution at TIAA. Contact him at [email protected].