Financial and investment planning: annuities in your 401(k)?

Will the requirement that some portion of your pension or profit-sharing plan be invested in annuities be a good result? This is diametrically opposed to the notion of fully privatizing Social Security floated by the prior administration. The former intends to protect investors from high risk and the latter would have allowed them to take any risk.

The recent market meltdown lead to the idea that annuities were appropriate. However, as Judith A. Hasenauer said in Will Annuities Be Mandatory in Qualified Plans?, “The recent problems of the financial markets notwithstanding, equity investments remain perhaps the best and maybe even the only types of investments that provide working people with some hope of achieving and maintaining their financial goals for retirement.”

At a finer level, would the annuities be fixed annuities, acting more like bonds or even Social Security, or variable annuities, where asset allocation strategies would be involved? In the former case, the potential returns are much lower and more assets would be needed. It the latter case, the upside is greater but so is the risk.

Perhaps the best mix will be to treat Social Security as the annuity/bond component and leave qualified plan investing as is, with some crucial exceptions. For example, no participant should be allowed or required to invest heavily in his or her own company (witness the Enron example).

If the President or Congress impose an annuity requirement, you will need to review your retirement plan in great detail, from both an investment and a financial independence perspective.

Let us know if you have questions or comments. Thanks,

Steven