What Is an In-Plan Annuity?

An in-plan annuity is a retirement income option offered within an employer-sponsored retirement plan, such as a 401(k), 403(b), or similar defined contribution plan. It allows plan participants to allocate a portion of their retirement savings toward an annuity contract—typically issued by an insurance company—that provides guaranteed income payments during retirement. These annuities are integrated directly into the retirement plan structure, meaning participants can select them as investment options and receive income without transferring funds out of the plan.

This feature has gained more visibility due to legislative changes such as the SECURE Act of 2019, which encouraged broader inclusion of annuities within workplace retirement plans by reducing fiduciary risk for plan sponsors and making it easier for participants to access lifetime income options.

Structure and Function

Unlike purchasing an annuity through an insurance agent or broker after retirement, in-plan annuities are selected and funded while the participant is still contributing to their retirement account. They can be structured in different ways, including deferred annuities that accumulate value over time or immediate annuities that begin payments soon after purchase.

The annuity option may appear alongside other investment choices in the plan menu, such as mutual funds or target-date funds. Participants can choose to allocate a portion of their regular contributions to the annuity or make a one-time transfer of existing assets within the plan.

When retirement arrives—or at a designated age—the annuity starts paying a guaranteed stream of income. Depending on the contract, this income can be for life, a specified number of years, or for the joint lives of the participant and a spouse. Some annuities also offer inflation protection or death benefits.

Types of In-Plan Annuities

In-plan annuities are typically offered in two forms:

1. Immediate in-plan annuities: These begin payouts shortly after a participant elects the annuity, often at or near retirement age. The annuity is purchased with a lump sum from the participant’s account.
2. Deferred in-plan annuities: These accumulate income credits or annuity units over time during the participant’s working years. They are designed to begin income payments at a future date, often after retirement.

Within these categories, contracts can be either fixed (guaranteed payments) or variable (payments vary based on investment performance), though fixed annuities are more common in in-plan settings due to the focus on income stability.

Benefits to Participants

In-plan annuities are designed to provide a predictable source of income, which addresses a common concern among retirees—outliving their assets. Because defined contribution plans do not inherently offer lifetime income, in-plan annuities can help fill the gap once provided by traditional pensions.

Additional potential benefits include:

• Simplicity and convenience: The annuity is embedded within the existing retirement plan, eliminating the need to shop for products post-retirement.
• Institutional pricing: Group pricing negotiated by the employer may lead to lower costs compared to individual annuities.
• Fiduciary selection: Employers must evaluate and select annuity providers based on specific regulatory criteria, offering a level of due diligence that individual buyers might not access on their own.
• Portability: Some newer annuity contracts allow the annuity to be moved to an IRA or another retirement plan if the participant leaves the employer, though portability is still a developing feature in many cases.

Considerations and Risks

Despite their advantages, in-plan annuities come with certain trade-offs that should be evaluated carefully. One is the loss of liquidity; once funds are committed to an annuity, they may be difficult or costly to access. Surrender charges or restrictions on early withdrawals can apply.

Complexity is another factor. The terms of annuity contracts can be detailed and difficult to compare across providers. Variables like income start dates, inflation adjustments, survivor benefits, and fees all affect the overall value and suitability of the product.

Participants must also consider provider risk. In-plan annuities are backed by insurance companies, not the federal government. If the insurer becomes insolvent, state guaranty associations may offer limited protection, but there are no FDIC-like guarantees for annuities.

Lastly, plan design influences availability. Not all employer-sponsored plans include annuity options, and even among those that do, the range of features and flexibility varies.

Regulatory Environment

The SECURE Act significantly changed the landscape for in-plan annuities by making it easier for plan sponsors to offer them. It created a safe harbor that protects employers from liability if they follow a set of criteria when selecting an annuity provider.

The legislation also allows for lifetime income disclosures, which inform participants how much monthly income their current balance could generate if used to purchase an annuity. These disclosures are intended to encourage long-term planning and awareness.

Plan sponsors now have greater freedom to offer portable annuity options, increasing the likelihood that these features will become standard components of retirement plans in the coming years.

The Bottom Line

In-plan annuities represent a growing strategy within workplace retirement plans to help participants secure guaranteed income in retirement. They offer the ability to transform a portion of defined contribution savings into predictable payments, similar to a pension. While not suitable for every individual, in-plan annuities can be a valuable option for those seeking income stability and institutional pricing within the structure of their existing retirement plan.