Do-It-Yourself Pensions- 401(k)'s to start offering annuities

Searching for a guarantee? Now add a guaranteed for life payment as one of your asset classes.

By KELLY GREENEJuly 14, 2007; Page R1

New products are helping people turn part of their 401(k)s into a steady paycheck in retirement. Here's how they work -- and what to watch for.

A number of companies are introducing products that for the first time allow workers to invest in annuities through their 401(k)s, the heart of many Americans' retirement savings. A 401(k), for the most part, is easy to understand and set up. But it doesn't offer a simple mechanism for creating a steady income in retirement. Annuities, by contrast, have long offered a way to generate a paycheck in later life but tend to be complicated, expensive and a general pain in the neck to shop for.

SHOPPING FOR A VARIABLE ANNUITY

The new products, in theory, offer the best of both worlds. Though currently offered at only a few dozen companies, the 401(k) option gives employees the ability to direct a portion of their 401(k) investment each month toward purchasing an annuity. Doing so can be cheaper than buying an annuity on the retail market (say, through an insurance agent or financial planner).

GUARANTEE -- BUT AT WHAT PRICE?
Insurers sell two main types of annuities: fixed and variable. Fixed annuities are either immediate, which means a lump-sum payment is made up front in return for set payments over a specified period or for life; or they are deferred, meaning they are purchased either with a single payment, or with installments, invested over time before the payments start. Fixed annuities offered in 401(k)s generally are deferred, with your money mainly invested in bonds and other fixed-income securities. Variable annuities, also either immediate or deferred, are typically invested in a portfolio with a sizeable chunk of equities, meaning their value and income-payment level can vary based on those investments' performance.

Taxes for deferred annuities (including those in 401(k)s) generally are not owed until the payments are made. Those payments generally are taxed at ordinary income rates.
Although both fixed and variable annuities are available in 401(k)s, so far most employers offer only one or the other. So it's important to know the relative advantages or disadvantages of both