Congress cleared the runway for annuity options in 401(k) plans, but almost nobody is buying them.
It sounds like the perfect fix for America's retirement anxiety. You spend decades building up a nest egg, and at the end, you flip a switch to turn that lump sum into a steady paycheck that lasts until the day you die. Lawmakers loved the idea so much they passed the SECURE Act in 2019 and followed it up with SECURE 2.0 in 2022. They made it much easier for companies to offer these lifetime income products without fearing massive lawsuits if the insurance company goes under.
Yet, savers are staring at these new options and keeping their hands firmly in their pockets.
The industry expected a flood. We got a trickle. Recent data from major plan providers shows that while more employers are adding guaranteed income features to their retirement lineups, actual participant enrollment is hovering in the low single digits. Workers aren't biting.
Why is there such a massive disconnect between what policy experts think savers need and what actual humans want to do with their money? The answer comes down to trust, complexity, and a deep-seated psychological aversion to handing over control of a lifetime's worth of savings.
The Big Push for Lifetime Income
For decades, the 401(k) system operated on a simple DIY philosophy. You save money, you pick some mutual funds, and you hope for the best. When you retire, you're on your own to figure out how much you can safely withdraw without running out of cash. It's a stressful guessing game.
The industry calls this decumulation. It's notoriously hard to manage. If the stock market drops right after you retire, your savings can take a hit you never recover from.
Annuities solve this specific fear. By embedding annuity options in 401(k) plans, employers wanted to give workers the same kind of predictable, steady income their grandparents got from traditional corporate pensions.
Insurance companies designed new products specifically for this market. We started seeing guaranteed minimum withdrawal benefits and deferred income options built directly into target-date funds. These are the default investment options where most retirement money goes anyway. The idea was to automate the process. As you get closer to retirement age, a portion of your account balance shifts into an insurance contract that guarantees a baseline paycheck.
Major asset managers partnered with huge insurers to roll these out. They pitched them as the ultimate safety net for an aging workforce worried about outliving their savings.
Why Workers Are Saying No Thanks
If the fear of running out of money is so pervasive, why are these products sitting on the shelf?
First, people hate losing control of their cash. Buying a traditional annuity often means making an irrevocable choice. You give up a lump sum of $200,000 or $500,000 in exchange for a monthly check of maybe a few thousand dollars. Once you sign that contract, that big pile of money is gone. If you get sick next year and need $50,000 for medical bills, you can't just raid the annuity.
People look at their 401(k) balance like a security blanket. Seeing a large number in an account provides immense peace of mind. Forcing someone to trade that visible wealth for a promise of future monthly income is a tough psychological hurdle.
Second, the products are incredibly confusing. Have you ever tried reading an insurance annuity contract? It's a dense forest of fine print, surrender charges, participation rates, and complex fee structures. When savers don't understand an investment, their default response is to do nothing.
Then there's the mobility issue. Americans change jobs frequently. The average worker holds about a dozen different jobs over their lifetime. If your current employer offers an embedded annuity inside your 401(k) and you leave the company in five years, what happens to that insurance guarantee? Moving a regular mutual fund or ETF to a new employer's plan or a traditional IRA is simple. Moving an in-plan annuity contract can be a logistical nightmare.
Sometimes the new plan won't accept it. You might be forced to liquidate the position, triggering fees or losing the guarantees you already paid for. Until portability becomes genuinely simple, workers will avoid these setups.
High Fees and Missing Transparency
Fees are another massive barrier. Regular 401(k) plans have become remarkably cheap over the last fifteen years. Thanks to intense competition and class-action lawsuits, index funds that charge next to nothing are standard. Workers have been trained to look for low expense ratios.
Annuities don't fit into that low-cost world. Insurance guarantees cost money. The insurance company is taking on the risk that you might live to 105, and they charge a premium for that risk.
These costs show up as administrative fees, mortality and expense risk charges, and underlying investment management fees. When a worker compares a basic S&P 500 index fund charging 0.05% to an income-guaranteed option charging 1.25%, the cheaper option usually wins. Savers struggle to see the value proposition of paying twenty times more for a feature they might not even use for another two decades.
Many corporate benefits departments are also dragging their feet. Human resources managers aren't insurance experts. They don't want to explain these complex products to angry employees during open enrollment.
Even though the SECURE Act gave employers a legal safe harbor, many corporate legal teams remain cautious. They worry that if the chosen insurance company suffers financial distress thirty years from now, retirees will still find a way to sue the employer for picking a bad provider. So, many companies simply offer the bare minimum or keep the options buried deep in the plan menu where no one sees them.
Breaking Down the Options That Actually Exist
Not all in-plan annuities are built the same way. If you check your retirement account today, you'll likely see one of three distinct flavors if your employer has adopted these programs.
The first type is the systematic withdrawal plan with an insurance wrapper. This functions like a normal investment account, but an insurer guarantees your balance won't drop below a certain level even if the market crashes. You pay an annual fee for this peace of mind.
The second type is a deferred annuity option embedded in a target-date fund. This is the most common approach for new implementations. When you're in your 20s and 30s, 100% of your money goes into stocks and bonds. When you hit age 50 or 55, the fund automatically starts using a small percentage of your ongoing contributions to buy future guaranteed income.
The third option is a window at retirement. Your plan doesn't change while you're working, but when you retire, the platform gives you direct access to an institutional annuity marketplace. You can take a portion of your final balance and shop around for the best rate from pre-vetted insurance providers.
This marketplace model often offers better pricing than buying an annuity on the open retail market. Because your employer's plan has bulk buying power, the insurers cut their fees to compete for your business.
How to Decide If It Makes Sense For You
Should you actually use these features if your company offers them? It depends entirely on your broader financial picture.
Look at your fixed sources of income first. Will you get a solid monthly check from Social Security? Do you happen to have a traditional military or government pension? If your guaranteed non-market income already covers your basic baseline living expenses like housing, food, and healthcare, you probably don't need an annuity inside your 401(k). You're better off keeping your money in low-cost index funds to maximize growth and flexibility.
If your Social Security check won't cover the rent, a guaranteed income product becomes much more attractive. It can act as a personal pension to bridge that financial gap.
Consider your health history too. Insurance companies price these products based on average life expectancies. If your family has a history of living well into their 90s, buying a lifetime income guarantee is statistically a better deal for you than for someone with chronic health issues.
Don't put all your chips on one space. You don't have to choose between a 100% lump sum or a 100% annuity. A smart compromise is allocating a small portion of your balance—say 20% or 30%—to a guaranteed income stream while leaving the rest in liquid, traditional investments. This gives you a guaranteed floor for your bills while keeping a large chunk of cash available for emergencies or unexpected opportunities.
Check the portability rules before you commit a single dollar. Ask your plan administrator exactly what happens if you leave the company next year. If they can't give you a clear, simple answer about how that contract transfers to an external IRA, walk away.
Talk to a fee-only fiduciary advisor who doesn't earn commissions from selling insurance products. Get a second opinion on whether the specific annuity options inside your company's plan are actually a good value or just an overpriced sales pitch wrapped in retirement marketing. Let them look at the fee disclosures. If the costs are eating up all your potential investment growth, you're better off building your own systematic withdrawal strategy using basic, cheap index funds.
