The Role of Annuities in Employer-Sponsored Retirement Plans

6 December 2025

Let’s cut to the chase—retirement planning can be complicated. There's a sea of information out there and a boatload of choices to make. But one financial tool that often gets overlooked (or misunderstood) is the annuity. And when it comes to employer-sponsored retirement plans, annuities can play a much bigger role than you might think.

So, if you're wondering how annuities fit into the picture of your 401(k) or other workplace retirement plan, you’re in the right place. This guide will break it all down for you in plain English—no finance degree required.

What’s an Annuity, Anyway?

Think of an annuity as a long-term agreement between you and an insurance company. You give them money—either in a lump sum or over time—and, in return, they promise to pay you income in the future. Kind of like planting a money tree that starts bearing fruit when you retire.

There are two major stages:
1. Accumulation Phase – when you pay into the annuity.
2. Distribution Phase – when the annuity starts paying you back.

There are different types of annuities (fixed, variable, indexed), but we’ll stick to the big picture for now.

Why Are Annuities Showing Up in Employer Retirement Plans?

You might not have seen annuities in your workplace retirement plan ten or fifteen years ago. But times have changed. Thanks to the passing of the SECURE Act in 2019, it’s easier now for employers to include annuities in 401(k)s and other defined contribution plans.

Think of the SECURE Act as a green light for employers to offer more guaranteed-income options—like annuities—without worrying about being on the hook if the insurer doesn’t deliver.

So, why the move toward annuities? Simple: People crave income certainty in retirement. Pensions are disappearing, Social Security alone isn’t enough, and many retirees are looking for a paycheck that lasts as long as they do.

The Pension’s Not Coming Back, But Annuities Might Fill the Gap

Remember the old-school pension plans? Those were sweet—the company took care of the future you. But now, traditional pensions have mostly gone the way of VHS tapes and dial-up internet. Most employers offer defined contribution plans (like 401(k)s), which put the responsibility—and the risk—on you.

That’s where annuities come in. They can mimic the good parts of pensions: predictable, guaranteed income. Instead of rolling the dice on the stock market or trying to stretch your savings over 30+ years, you get monthly income you can count on.

Benefits of Including Annuities in Employer-Sponsored Plans

Okay, let’s get into the good stuff. What are the real perks of having annuities in your retirement plan at work?

1. Guaranteed Lifetime Income

This is the biggie. With the right annuity, you can lock in income for life—even if you live to 110. That’s some serious peace of mind.

2. Reducing Longevity Risk

Most people fear outliving their money more than they fear death. Morbid? Maybe. Real? Absolutely. Annuities help ease that fear because the income doesn’t run out as long as you’re alive.

3. Simplified Retirement Planning

Managing your nest egg during retirement is a job in itself. Annuities simplify the process: You know how much money will be coming in, and you don't need to obsess over market swings every day.

4. Professional Management

When annuities are part of a workplace plan, they’re typically handled by vetted providers. That reduces the risk of picking the wrong company or product.

5. Tax-Deferred Growth

Like other retirement plan investments, your annuity grows tax-deferred. You pay taxes only when you start drawing the income.

But Wait—Annuities Aren’t Perfect

Let’s keep it real. Annuities have benefits, but they’re not for everyone or every situation. Here are a few drawbacks:

1. Fees Can Be Steep

Some annuities come with layers of fees—management fees, rider fees, surrender charges, you name it. Always read the fine print.

2. Limited Liquidity

Once your money’s in an annuity, it’s not always easy (or cheap) to get it back out early. It’s like ordering a meal at a fancy restaurant: once it’s on its way, good luck changing your mind.

3. Complexity

Some annuities are as complicated as tax law. Variable annuities especially can leave your head spinning. That’s one reason employer plans often offer simpler versions, like fixed annuities.

4. Inflation Risk

Unless the annuity is specifically designed to rise with the cost of living, your purchasing power could shrink over time. Imagine living on $2,000 a month in 2045—it may not go as far as it does today.

Types of Annuities You Might See in a Retirement Plan

When annuities show up in your 401(k), they usually come in one of these forms:

1. Qualified Longevity Annuity Contract (QLAC)

QLACs are a popular choice in employer plans. They let you take a portion of your retirement savings and turn it into a stream of income that kicks in later—say, at age 80. It’s like setting a financial alarm clock for the future.

2. Immediate Annuities

These start making payments right away. Great for folks near or in retirement who want to convert part of their 401(k) into a paycheck now.

3. Deferred Income Annuities

Think of these as the slow cookers of the annuity world. You invest now, and it starts paying later—maybe in 5, 10, or even 20 years.

4. Fixed Indexed Annuities

These offer returns tied to a market index (like the S&P 500) but with a safety net—you won’t lose money if the index tanks. Just don’t expect wild returns, either.

How to Decide If Annuities Belong in Your Retirement Strategy

Not everyone needs an annuity, but they can be a smart tool in the right circumstances. Ask yourself:

- Do I want guaranteed income I can’t outlive?
- Am I nervous about managing investments in retirement?
- Will my other income sources (like Social Security or a pension) cover my expenses?
- How long do I expect to live?

If you answered yes to the first two questions, it’s worth looking into.

Keep in mind, you don’t have to go all in. You can annuitize just a portion of your retirement savings and keep the rest flexible.

Tips for Evaluating Annuities Within Your Plan

If your employer retirement plan offers annuities, here’s how to approach them:

✅ Compare Options

Not all annuities are created equal. Pay attention to fees, payout options, and how solid the insurance company is.

✅ Ask About Inflation Protection

Can your payments rise over time to keep pace with inflation? If not, you might lose purchasing power down the road.

✅ Look at Survivor Benefits

Many annuities offer joint-life or survivorship income so your spouse is covered too. Make sure you understand the options available.

✅ Understand the Payout Options

Do you want monthly income for life, or for a set number of years? Can you combine both? Choices matter.

✅ Talk to a Pro

Seriously—this stuff is complex. A financial advisor can help you figure out if annuities belong in your plan and which type makes the most sense for you.

The Future of Annuities in Retirement Plans

With longer life expectancies and fewer pensions, annuities are stepping up to play a bigger role in retirement income planning. More and more employers are warming up to the idea of including annuities in 401(k)s and similar plans—not just as an extra perk, but as a core feature.

In fact, the next 10 years could see annuities becoming as common in retirement plans as index funds are today.

Final Thoughts

At the end of the day, annuities in employer-sponsored retirement plans aren’t a magic bullet—but they can be a powerful part of your retirement income toolkit.

They offer something that’s getting harder to find: guaranteed income for life. And when used wisely, they can provide some serious peace of mind. Yes, you need to keep an eye on fees, fine print, and inflation risk. But don’t dismiss them outright just because they’re “insurance products.”

If your workplace retirement plan offers annuities, take the time to understand them. Ask questions. Crunch some numbers. And remember, retirement isn’t about hitting a magic number—it’s about creating a lifestyle that you can enjoy, without stress.

So maybe—just maybe—annuities deserve a second look.