Due to changes in federal retirement law, annuities as a benefit have recently gained attention. However, their use in workplace plans remains limited. The Plan Sponsor Council of America published their 68th Annual 401(k) Survey in late 2025 and found that only 8.9% of respondents had an in-plan annuity for the 2024 plan year. Even though this number is low doesn’t mean you should ignore the option. If your organization has key employees who’d value this benefit or if it could help attract critical hires, you should highly consider it.

Defining The Concept

Annuities are contracts issued by insurance companies that can provide guaranteed income in retirement, often until the end of the contract owner’s life. Traditional annuity contracts require an individual to make either a lump-sum payment or a series of payments to the insurer in exchange for income paid out at regular intervals during retirement.

Because traditional annuity contracts are typically bought with after-tax dollars, the buyer generally doesn’t receive a current tax deduction. Later, when distributions begin, the earnings portion of each payment is usually taxable as ordinary income, while the portion representing the buyer’s original investment typically isn’t taxed again.

An alternate version is the qualified employee annuity. Under these arrangements, an employer sponsors an annuity through a qualified retirement plan or as a retirement benefit under a plan that meets certain Internal Revenue Code requirements.

In many cases, the annuity serves as an investment or distribution option within a plan rather than as a separate benefit. Contributions are generally made with pretax dollars, earnings grow tax-deferred, and distributions are generally taxed as ordinary income. (A portion may be tax-free if after-tax contributions are involved). In this context, the annuity is simply the investment vehicle — the tax treatment generally follows the rules of the underlying retirement plan.

Recognizing The Differences

Annuities and traditional 401(k) plans are similar in that they allow tax-deferred growth of account funds. But they also have key differences, which some employees may appreciate. For example, as mentioned, annuities can provide a predictable income stream that might last throughout a participant’s lifetime. A traditional 401(k) account balance, by itself, doesn’t come with that kind of guarantee.

Also, employee-participants can contribute only a specific amount to their respective 401(k) accounts annually. In 2026, the limit is $24,500 (not including catch-up contributions, if applicable). Whether contribution limits apply to an annuity depends on how it’s offered. If the annuity is held within a qualified retirement plan, the usual limits still apply. That said, some employees may find annuities appealing for their income guarantee rather than for contribution flexibility.

Then again, the fixed rate of return guaranteed by an annuity may be lower than the returns available through other investments. Also, unlike a 401(k), some annuities’ payout options may provide little or no value to heirs after the account owner’s death, depending on the contract terms. (Some annuities can include survivor or death benefit features).

Another consideration is that annuities typically don’t permit participants to borrow money from their accounts. A loan feature, common to many 401(k) plans, is often appreciated by participants for emergencies, despite the downsides of taking out such loans.

Participants may be able to take early distributions from a qualified employee annuity if the plan permits them. However, the taxable portion is generally subject to ordinary income tax and may also be subject to a 10% additional tax if taken before age 59½, unless an eligible exception applies.

Catching Up With The Changes

Although 401(k) plans could include annuity features before 2019, the SECURE Act encouraged wider adoption by:

• Giving plan sponsors a clearer fiduciary safe harbor for selecting insurers
• Making certain lifetime income investments easier to preserve when employees change jobs

 
SECURE 2.0, enacted in 2022, made several related rule changes. These include updates affecting longevity annuities and retirement plan distributions, which may further support lifetime income planning. In many cases, employers that sponsor annuities do so by offering a lifetime income option within an existing defined contribution plan rather than by replacing the plan altogether.

Assessing The Complexities

Many employers remain hesitant to sponsor annuities because of their complexity and fiduciary considerations. For instance, choosing a provider requires a careful review of the insurer’s financial strength, the contract terms and the associated costs. Also, there are generally fees involved with annuities that vary by provider and contract, adding another layer of complexity to administering annuities — particularly when participants leave the organization.

In addition, employers need to think about employee communication. Annuities can be complicated, and participants may need help understanding fees, liquidity restrictions, payout options, and beneficiary implications before electing this type of benefit.

Making The Right Call

For some small and midsize employers, offering an annuity-related benefit may be a worthwhile addition to their benefits package. But, as you can see, these products are hardly simple. Contact us for help determining whether an annuity plan or feature is right for your organization.