This explains how the product works; it is not financial advice.

What an annuity is

An annuity is a contract with an insurance company. You hand over a sum of money — all at once or over time — and the insurer promises to pay you income, either for a set number of years or for the rest of your life. Converting that lump sum into a stream of payments is called annuitization.

Think of it as buying yourself a pension. Unlike a 401(k) balance that can be drawn down or dented by a bad market, an annuity check keeps arriving. That predictability is the whole appeal — and the root of most of the drawbacks.

Why they're appearing in 401(k)s now

For decades, employers kept annuities out of workplace plans, worried they could be held liable under federal retirement law if the insurer later failed to pay. The SECURE Act of 2019 changed that by creating a fiduciary safe harbor — a legal shield for employers who follow a prescribed checklist when picking an annuity provider, including verifying the insurer has been state-licensed for the prior seven years, per the Department of Labor's rule. Meet those steps, and the employer is largely protected even if the insurer can't pay.

The follow-up SECURE 2.0 Act of 2022 widened access further — including raising the contribution cap on a specialized product called a QLAC (below). The 2019 law also added portability: if your plan later drops an annuity option, you can roll the contract into an IRA without penalty.

The appeal: not outliving your money

The industry calls it longevity risk — the chance of living so long that your savings run out. With traditional pensions largely gone from the private sector and people living longer, that risk is real. An annuity addresses it directly: because the insurer pools risk across thousands of customers — some of whom die early — it can keep paying those who live longest, something an individual managing their own portfolio can't replicate. For someone without a pension and nervous about managing withdrawals through volatile markets, a guaranteed income floor can be genuinely valuable.

The main types

FINRA, the brokerage industry's regulator, groups annuities into a few categories:

  • Immediate — you pay a lump sum and income starts almost right away; suited to someone at retirement.
  • Deferred — you pay now, income starts years later, in exchange for a larger future payout.
  • Fixed — the insurer guarantees the rate and the payment; predictable, but fixed in dollar terms.
  • Variable — payments rise and fall with underlying investments; returns aren't guaranteed, and FINRA notes variable annuities are "a leading source of investor complaints" because of their complexity.
  • QLAC (Qualified Longevity Annuity Contract) — a deferred annuity bought inside a 401(k) or IRA. Its appeal is tax timing: money in a QLAC is excluded from the balance used to calculate required minimum distributions (the withdrawals the IRS forces starting at 73), and payments can be deferred as late as age 85. SECURE 2.0 raised the lifetime QLAC cap to $200,000, indexed for inflation, per the IRS.

The drawbacks: what you give up

Fees. Annuities layer on charges — mortality and expense fees, administrative costs, and optional rider fees — that plain index funds don't have. FINRA warns these can run well above comparable fund costs, and even a 1% annual drag adds up over decades.

Lock-up. Pull money out early and you may owe a surrender charge — a penalty, sometimes high in the early years, that fades over time. That illiquidity is the price of the guarantee.

Inflation. A fixed $3,000-a-month payment buys far less in 20 years. Most basic annuities have no cost-of-living adjustment; those that do cost more or pay less upfront.

Insurer risk. The guarantee is only as strong as the insurer behind it. Annuities aren't FDIC- or SIPC-insured; if an insurer fails, state guaranty associations cover only part, with limits that vary by state. Checking an insurer's financial-strength rating first is prudent.

How to think about it

Planners generally suggest a few questions before annuitizing any part of a 401(k): Do Social Security and any pension already cover your essential bills? (If so, the case is weaker.) How is your health? (An annuity favors those who live longer.) How much liquidity will you need for housing or health care? And what are the all-in costs versus buying an annuity outside the plan? An in-plan option offers convenience and some employer vetting — but convenience doesn't make it the right product for everyone.