Qualified Annuity Sales Go Mainstream

Clark Randall, a certified financial planner at Lincoln Financial Advisors, Dallas, Tex., adds that group annuities tend to be more expensive than mutual funds, which are still the principal vehicles for funding qualified plans. To illustrate, Randall recounts how he saved one small business client more than $14,000 annually in administration costs by changing the firm's defined contribution plan from a group annuity to a mutual fund-based contract. The annuity's added cost, representing about 1% of assets under management, was borne by employees as a fee charged against their return on investment.

To be sure, says Randall, the group annuity does have a place in the market. "I can envision a group annuity for companies that don't have much excess cash with which to set up a qualified plan," he says. "The product is typically a bundled contract wherein the insurer does all the administration. And because the fee structure is built into the plan, companies don't have to pay out cash flow to fund it.

"But the moment the company grows to, say, $500,000 in assets, then it's probably time to think about moving into a lower-cost plan wherein it makes sense to pay a third-party administrator to do the calculations separately," he adds. "The company is now absorbing the cost to administer the plan; and employees are paying management fees for the mutual funds in which they're invested."

To make annuities more attractive inside 401(k) plans, some companies are offering both immediate and deferred annuities as an investment option, as opposed to a group-wide product. Boomer-age plan participants could thus choose from varied mutual fund options in the plan and also allocate a certain portion of their money to the insurance contract.

Hancock's Buckingham suggests, however, that marketers of qualified annuities may have to wait for new federal legislation before the products (either individual or group) achieve widespread adoption in 401(k) plans. When that day arrives, employees will stand to gain–and not just because of products' much-touted guarantees.

"For most clients, substituting an immediate annuity for bonds in a portfolio is the best way to get the most out of your retirement dollars," says McCarthy. "That's because an immediate annuity yields a higher cash flow. And when combined with dividend-paying stock, you get both tax advantages and growth."