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Ask the Experts

Sizing Up a 401(k) Annuity

Fixed monthly payments may help in retirement, but watch out for the fees

Q. There's talk that my company might offer annuities as an option in employees' 401(k) accounts. I'm skeptical. Aren't annuities expensive and not always the best investment for a retiree?

A. A small but growing number of employers are offering deferred annuities in their employees' defined contribution plans. Though annuity plans vary, deferred annuities provide a guaranteed income stream in retirement, which is especially important to people who don't have pensions to rely on. Generally, workers are able to use part or all of their 401(k) funds to buy annuities that pay a fixed amount for life when they retire, regardless of stock market swings.

See also: Know your investment options and be aware of 401(k) fees.

Dominoes connect the dots to consider taking a 401(k) as an annuity

Make sure you know the fees involved when annuitizing a 401(k) account. — Waldhaeusl com/Age fotostock

Depending on the plan sponsor, you might pay various administrative costs just to annuitize a 401(k) account, so it's important to understand these charges before making a decision. As you say, annuities may not be the right choice. This is especially true for people who have smaller 401(k) account balances or can expect a large fixed monthly income from pensions or other annuities.

If your company decides to go forward and offer 401(k) annuities, be sure to learn whether there are costs to annuitize and if there are regular management fees. These fees ultimately reduce the amount of retirement income you'll receive.

Having said that, keep in mind that companies can buy annuities at institutional rates and offer them to their employees in 401(k) plans. That means you'd probably get a better deal on an annuity from your 401(k) plan than you'd get on your own.

Alternatively, you may choose to wait until two to three years after you retire to know specifically what your expenses will be, then annuitize your IRA funds with a mutual fund or insurance company. The amount of the annuity isn't taxed, only the distribution is.

If you're like many of today's workers and are largely relying on your 401(k) and the value of your home for your retirement, an annuity that provides a fixed monthly income may make all the difference in helping you feel more financially secure in your later years.

Carole Fleck is a senior editor at the AARP Bulletin.

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