Wealth Planning Commentary – October 13, 2025

Annuities as a Default Option for 401(k)s? U.S. Department of Labor Says Yes, But Be Wary

Recent updates to retirement plan rules are designed to make it easier for employers to include lifetime income options—most commonly annuities—inside 401(k) plans. The purpose is straightforward: to help you turn a portion of your savings into a dependable “retirement paycheck” you can’t outlive. Employers now have clearer guidance (often called a fiduciary “safe harbor”) for selecting and monitoring annuity providers. When they follow a prudent process, their liability is limited, which makes them more willing to offer these options. Just as important, portability rules have improved. If your company changes its plan lineup or removes an annuity option, you can generally move the annuity you’ve already built to another qualified plan or an IRA without penalties, so you don’t have to lose the benefit of guaranteed income you’ve set aside.

Here’s how an in-plan 401(k) annuity typically works. Within your 401(k), you can choose—or sometimes be defaulted into—an investment option that gradually directs part of your ongoing contributions into an annuity contract. That contract may be fixed (steady, pre-set payments), variable (payments tied to investment performance), or indexed (payments linked to a market index, usually with a floor and a cap). When you retire, you can convert that contract into an income stream that pays monthly or annually for your lifetime (and, if you choose, your spouse’s lifetime), creating a predictable cash flow to help cover essentials like housing, groceries, and healthcare.

The potential advantages are meaningful. Most notably, an annuity can reduce “longevity risk,” the chance that you’ll outlive your savings, by guaranteeing income for life. Because these annuities are offered inside large employer plans, fees are often negotiated at the institutional level, which may make costs more competitive than buying a similar product on your own. For investors who feel uneasy about market swings, having a stable income floor can bring real peace of mind and may allow the rest of the portfolio to stay invested for growth. The newer portability protections add flexibility if your employer changes providers, and the safe-harbor framework encourages ongoing due diligence by the plan sponsor so the offering is monitored over time.

That said, it’s important to be aware of the risks that come with annuities. Guarantees come with trade-offs: annuities tend to carry higher fees than plain index funds, and dollars committed to a guarantee are generally less liquid before retirement. Your income ultimately depends on the financial strength of the insurer, so checking independent ratings is essential. Not every plan is required to select the absolute lowest-cost provider; what matters is a prudent process, so you should still read the fee disclosures and compare. Annuities can also be complex. Optional riders—like inflation adjustments or survivor benefits—can improve protection but add cost and may reduce starting income. Suitability depends on where you are in your career: younger workers often prioritize long-term growth first, then add guaranteed income as retirement approaches. And because there are alternatives—such as IRA-based annuities, bond ladders, or systematic withdrawal strategies—it’s worth weighing the after-fee, after-tax value of each approach.

Given these nuances, it’s worth revising your 401(k) periodically to understand exactly what you hold. Many participants aren’t aware that their plan may already include an annuity component or that they may have been defaulted into one. If your retirement accounts do include annuities, it’s a good idea to talk with your plan administrator and request more information for specifications.