Many employers offer 401(k) retirement plans that are actually within group annuities. To most employees, there is little distinction made between a retirement platform of this type versus a 401(k) held at a mutual fund company. Although the differences may be small, it is important for employees to understand which type of plan they have in order to take full advantage of their plan’s features.
A 401(k), regardless of whether it's held at a mutual fund company or within an annuity, is designed to provide employees with an appropriate method and outlet for accumulating money for their retirement. Accounts of these types offer tax-deferred savings deducted in small amounts from each paycheck; the contributions remain in the account until they are withdrawn after the appropriate retirement age has been reached by the employee.
There are two basic types of 401(k)’s used by the majority of employers—those held with mutual fund companies and those held with annuity companies. The differences are almost indistinguishable to the average employee, yet can present significant advantages if used properly. 401(k)’s held at mutual fund companies typically offer employees several different mutual funds within which their contributions can be allocated. These funds each have their own investment objectives, performance histories, and fee schedules. None of these fund choices allow for a fixed rate of return, nor do they offer protection against declines in the stock market.
Conversely, 401(k)’s that are within group annuities often have extremely similar investment choices, but with additional options not available from mutual fund companies. Since annuities are insurance products, different regulations allow for the inclusion of fixed-interest investment choices, as well as other more advanced options available from some insurance carriers.
New annuity products are created every year by the leading insurance companies in the country, and many of them have features that are available to groups that choose to deposit their 401(k) retirement assets into an annuity. Some insurance companies offer employees the option of investing in accounts that will guarantee certain interest rates. Others offer choices that only partially participate in the performance of the stock market. Still other annuities allow employees to guarantee themselves a certain rate of return over the course of their lives. Every annuity company will have its own suite of group-retirement products, and each product will have its own set of available features that may be customized by the various businesses that choose to invest 401(k) assets.
Too many people make the mistake of believing that their investments into 401(k)’s held within group annuities are protected from stock market losses because the annuity is with an insurance company. This is not the case. Sub-accounts within variable annuities used for group-retirement products are in no way insured against market declines. Unless the employee specifically elects to have his contribution deposited into an account that does not participate in the performance of the stock market, his account value is at risk. Many 401(k) annuities offer these types of accounts, and it is essential that employees understand which investment options are subject to market risk and which are protected from declines.
Employees have significantly more potential to protect their retirement assets when their employer’s 401(k) account is held within a group annuity. Since internal transfers are usually free of charge, the employee is typically able to shift assets from one sub-account to another without incurring a penalty. This feature, combined with the existence of fixed-interest investment choices, gives employees a wide range of allocation options that can be used to create a portfolio to last decades—and withstand stock market average ups and downs.