401(k) annuities on the rise

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The number of companies that offer annuities in their retirement plans is set to double this year, but should you pursue this tool?

According to an October 2011 survey by Aon Hewitt, which is a human-resources consulting and outsourcing company, 16 percent of 500 companies that the firm surveyed include annuities in their retirement plans, and another 16 percent plan to add annuities this year. We believe that annuities that include death-benefit and income-benefit riders make sense for workers who have scant retirement savings. Annuities that have these riders can be used to ensure a steady stream of income in retirement.

Although you get the certainty of an income, you should know that annuities are comparatively expensive: An annuity that has riders will cost you about 3 percent to 4 percent of your investment, compared with about 1.5 percent of your investment in mutual funds.

Annuities and their riders are complicated financial instruments, so you likely will want to seek advice from an investment pro. Further, insurers “are investing today in a low-rate environment, which gives us concern about their ability to honor promises made,” says Lydia Sheckels of Wescott Financial. In other words, she says, the guarantee of an annuity is worth something only if the insurer is financially sound and has priced its products conservatively, which would allow it to have enough funds to keep that commitment.