4 Downsides of a Variable Annuity 401k

If you are planning on getting involved with a variable annuity 401k, there are several things that you will need to consider. While this investment can work out for some people, there are definitely some drawbacks that you need to be aware of. Here are a few downsides of investing in a variable annuity 401k.

1. Investment Risk

Variable annuities are not like the traditional fixed annuity. With a variable annuity, you are basically investing money into a subaccount. With the money in the subaccount, you will be choosing individual securities to invest in. For example, you might decide to put some of the money into a bond fund or a money market fund. This investment strategy shifts the burden of investing for your retirement onto you. Instead of relying on a professional money manager as you would with other types of annuities, you are responsible for your own success. While you might have some investment advice along the way, this is not a passive form of investment. If you are looking for an annuity that will take care of your retirement planning for you, this is definitely not it.

2. Fees

Another drawback to investing in a variable annuity with your 401k funds is that you will have to pay fees. Many annuities charge fees that are deducted from the premiums that you pay on a monthly basis. Other annuities will take some money out of the gains from the investments. These fees are designed to cover the costs of the annuity company. Most people are already paying fees for their 401k, and paying annuity fees just adds to their financial burden. With all of these fees, you have to earn additional money with your investments to make up for what you pay.

3. Risk of Investing with an Insurance Company

Another problem with investing in variable annuities with your 401k money is the risk associated with this type of investment. When you purchase variable annuities, you are essentially going to be working with an insurance company. While insurance companies are traditionally very strong financially, they have been known to go out of business. When this happens, all of your retirement money will go with them. All of the money that you have worked hard to accumulate over the years could potentially be lost. In some cases, there are provisions to protect insurance companies, but this is not always the case.

4. Limited Benefit

The benefits that you will receive from investing in a variable annuity will most likely be limited. You are basically opening an investment account and hoping that it generates enough money to provide you with a paycheck during your retirement. However, this is essentially the same thing that you are doing with your 401k. This is just another way of going about investing your money. Most people look at annuities as a way to automate the process of planning for retirement. If you are going to choose your own investments and handle everything, you might as well just stick with your 401k. 

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