Using Pretax Dollars to Generate Guaranteed Lifetime Income

The FIA with guaranteed income rider allows clients to access the cash value if necessary, though it is important for clients to know that possible surrender charges should make this a last resort. Therefore, while the potential for accessing the cash in the annuity in case of emergency may appeal to many clients, this very feature could defeat the purpose of the planning strategy.

Not all employers that offer 401(k) options currently provide the FIA with a guaranteed income rider option because of the administrative modifications that are necessary in order to offer the choice. While the option may become more common as the market for in-plan annuities grows, many employers may currently be unwilling to adopt the administrative processes necessary to offer them because of additional costs or may simply pass along the extra costs to employees, making the option less attractive.

Potential Downside

Some clients may find that it makes less sense to hold FIAs within their 401(k) accounts because, while the FIA allows funds to grow on a tax-deferred basis, so does any 401(k) account—regardless of the client’s investment choices. As such, many might argue that using the in-plan annuity strategy provides little additional benefit, as the funds will grow tax-deferred whether the annuity is held within the 401(k) or outside the plan.

In fact, for wealthier clients, this raises a suitability issue; clients who have sufficient savings outside of tax-deferred retirement vehicles to purchase separate, independently tax-deferred products to guarantee retirement income should be advised that the in-plan strategy is not best suited to maximizing tax-deferred savings. Because there is an annual limit on the level of funds that can be contributed to a tax-deferred 401(k) each year, some clients would be best advised to maintain an annuity outside the plan in order to maximize the annual tax-deferred investments.

Purchasing the annuity with pre-tax dollars, however, can be attractive to clients who are nearing retirement age because it may allow them to allocate more to the product, thereby increasing their guaranteed income and simplifying their planning by consolidating investment vehicles. Younger clients, on the other hand, may find that allocating funds toward the guarantee can limit their ability to invest in more aggressive investments that might be more appropriate for their risk tolerance level.

Conclusion

For clients looking to both guarantee retirement income and simplify planning by managing the annuity product under a single umbrella vehicle, the FIA with guaranteed income rider may provide an appealing solution, especially as more employer-sponsored 401(k) plans move toward offering the option in the future.