What Can the DC Universe Learn from Annuities in 403(b) Plans? It’s Complicated

One thing the defined contribution community seems to agree on is that annuities are complex.

In a January 2024 Greenwald Research survey for example, more than half of plan sponsors who responded said annuities were too complex.

The complexity of the products is not just how they work and what they cost—which are also often complicated—but ascertaining what products work best, and what participant demand looks like.

That’s not to say annuities are new. TIAA, a financial services organization, has been offering fixed annuities since its founding by Andrew Carnegie in 1918 and invented the variable annuity in 1952, and the product has been available in 403(b) plans since they were established in 1958—both predating the Employee Retirement Income Security Act of 1974.

Still, data on demand and use of the annuities is sparse. The recent study by Greenwald Research and TIAA, which surveyed 225 finance leaders in the 403(b) and 401(k) space found that 20% of respondents had offered guaranteed income annuity products. A recent TIAA study also pointed to strong participant demand.

Meanwhile, a study by MFS Investment Management of 166 plan sponsors, conducted in September and October 2024, found 17% of respondents were “very” or “extremely” likely to implement a retirement income solution in the next 12 to 18 months.

And according to a June 18 report by the Investment Community Institute, annuities comprised $2.4 trillion of the $43.4 trillion in retirement assets in Q1 2025, or 5.6% of total retirement assets. Annuities have hovered around the $2 trillion mark for the past few years, but are below their peak of $2.6 trillion in 2021, according to the report.

While this provides a snapshot, it does not tell the whole story. The passage of the SECURE Act 2.0 in 2022, however, gave the DC retirement community more regulatory cover to explore and implement guaranteed income solutions. As DC plan sponsors weigh their options—ramping up promotion of existing annuities or developing new ones in response to shifting demand and loosened rules—they would do well to examine how annuities have long been used in 403(b) plans. But the lessons there, too, are nuanced.

“It’s well accepted that the complexity of the process of buying an annuity a major hurdle,” says Gal Wettstein, associate director of health and insurance at the Center for Retirement Research at Boston College. “If plan participants, employers and/or policy makers want, annuities to be taken up more broadly within employer plans the bureaucratic ease needs to be substantially greater than the what’s currently available on the market.”

For David Blanchett, portfolio manager and head of retirement research for PGIM’s DC solutions, part of the difficulty with the annuity equation versus a traditional investment comes down to what options participants have if they don’t like the product.

“With a target date fund, if a participant doesn’t like it, you’re fired, and there’s no residual risk once they replace us with Vanguard, or whoever once we are out of the plan,” he says. “When you have money allocated to a lifetime income solution you might not be able to just get out of that, because what you could have been paying this premium for 10 or 15 years. Then what happens if the product doesn’t work?”

Despite the challenges, 403(b) plans have had success with annuities, which could offer plan sponsors of 401(k) plans solace to adopt the products.

But research by the U.S. Government Accountability Office, indicated the high cost of annuities in 403(b) plans. Specifically, fees for investment options in 403(b) plans, which ranged from 0.01% to 2.37%, according to the study, with many of the 403(b) plans analyzed having surrender fees—charge by an insurer in some cases when an owner withdraws funds from an annuity before the end of a specified holding period—as high as 10% for some of the annuity options.

High fees are unpopular with participants and may expose plan sponsors to litigation risk, according to legal experts—making some sponsors reluctant to adopt annuities. Still, proponents argue that annuities offer meaningful value and are poised to play a growing role in 401(k) plans.

Jim Mullery, executive vice president and head of institutional relationship management at TIAA, for one, says annuities have played a significant role for TIAA’s participants, which he says are especially valuable in times of market volatility or economic uncertainty, such as the recent pandemic, or April’s so-called “Liberation Day.”

If a retiree has $500,000 saved, using the 4% rule they’d withdraw $20,000. If markets gyrate or as their assets deplete overtime, they’d have to also withdraw less from the assets.

“The challenge with the 4% rule is that you are going to have variation in your lifetime income. The other challenge that you will also face is … are you going to stick with the investment?” he says. “Most people over the age of 65, once you stop earning and you stop contributing, and [the nest egg] has to last for the rest of your life. If you hit a period of volatility, we often see people move to more conservative investments. So, their equity exposure will be gone, which means their ability to be able to keep up with inflation over time is going to be challenged.”

While some industry experts question the benefits of annuities, many interviewed for this article say that differences in the participant base between 403(b) and 401(k) plans make it difficult for the defined contribution space to broadly apply lessons from annuity use in 403(b)s plans.

According to recent research by the MissionSquare Research Institute, public–sector DC plan participants, compared to private–sector 401(k) participants, are more likely to accept default investment options provided by their retirement plan sponsor.

The research suggests 403(b) plan participants are perhaps more willing and interested in what products their employer has available, says Blanchett, who co-authored the research.

Meanwhile, Corebridge Financial, a financial services company that offers annuities, conducted a survey of public-sector employees, who are more likely to be in a 403(b) plan, that found that more than 90% of workers felt having an annuity that provides lifetime income appealing, with 74% responding that they would likely choose an annuity if it were offered as an investment option in their employer-sponsored retirement plan.

“Using annuities to generate lifetime income can be similar regardless of retirement plan vehicle,” says Jenny Glowacki, head of in-plan advice and income and retirement services at Corebridge Financial. “Since participants in 403(b) plans generally have more access to traditional pensions than participants in 401(k)s, we see a greater understanding for and appreciation of annuities from 403(b) participants.”

Whether annuities continue to grow in DC plans remains to be seen, but experts agree that unraveling the complexity of the product would benefit plan sponsors and participants alike.

“There’s mystery around the annuity puzzle: What are annuities?” says TIAA’s Mullery. “There is often a public perception that they are expensive, or that there’s a question about their sales practices because they’re commissionable products—that’s been a significant headwind for individuals to better understand and have annuities as part of their core asset growth space in the in the 401(k) marketplace. But there’s still significant opportunities.”

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