The Complexities of the 401k Annuity

When it comes to investing in an annuity, 401k investors are starting to prefer this option. However, this type of investment carries with it some complexities that you need to be aware of. Here are a few things to consider about the complexity of a 401k annuity.

The 401k Annuity

The 401k annuity is a type of investment that can provide you with a regular income upon retirement. With this type of investment, you can invest a certain amount of money from your regular 401k contribution toward its purchase. Upon reaching retirement age, you will be able to receive a fixed monthly payment for the rest of your life. Many investors choose this type of investment because of the security that it can provide during retirement. While this sounds like a great investment, there are a few issues that you should be aware of before putting your money into one.

Company Risk

Annuities are products issued by insurance companies. Instead of working with a traditional brokerage account, you will be purchasing a type of insurance policy. With this in mind, you need to be aware of the fact that the insurance company could go out of business. Although many of the largest insurance companies have been around for well over 100 years, you never know what could happen in the future. If you are putting a big chunk of your retirement dollars into this type of product, you could eventually lose it all if the company went out of business. Therefore, you have to put a lot of faith in one individual company to provide for you during retirement.

Individual Risk

In addition to company risk, you will also have to worry about individual risks that you might face. If you were to pass away before reaching retirement age, all of the money that you have invested up until that point would be gone. Your loved ones would not be able to receive any of the money that you have invested. This is drastically different from most other types of investments. For example, if you had invested in mutual funds over the years, your loved ones would be able to liquidate your shares and gain access to the money that you had invested.

Complex Provisions

Annuities are known for complexity when it comes to their provisions. With all of the different scenarios that most annuities present, it can be difficult to know what you are getting. Therefore, if you are trying to shop around for the best deal on an annuity, you might be disappointed. You may not be able to compare apples to apples between insurance companies. Since many consumers fear that they are being taken advantage of by insurance companies, this can present a problem for investors looking for the best deal.

Administrative Problems

Another problem with this type of investment is that it can be a headache to switch annuities if you change jobs. Many people do not stay in the same company throughout their working lives. When you switch retirement plans, the administrator may have problems switching over your annuity.

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