Guaranteed Income in Your 401(k)? Sounds Good in Theory, But What's the Catch?
In the world of retirement planning, the idea of guaranteed income is like a siren's call to many. It's an enticing prospect, especially for those who fear outliving their savings. But, as with any financial product, there's more to it than meets the eye. Let's dive into the world of target-date funds with built-in annuities and explore why, despite the hype, they might not be the panacea they're made out to be.
The Allure of Guaranteed Income
For many retirees, the biggest fear is running out of money. The average 65-year-old in the US can expect to live well into their 80s, and many will live longer. Stretching retirement savings across two or three decades creates real uncertainty. Delaying Social Security can help maximize lifetime benefits, but many retirees may not have the flexibility to wait until age 70. Annuities are designed to address this problem by converting savings into a stream of guaranteed lifetime income.
Historically, using 401(k) assets to buy an annuity often meant leaving the plan and entering the retail market, where participants could encounter expensive and opaque products sold through commission-driven channels. In-plan annuities look different. They generally involve no commissions, and costs tend to be lower, given that they typically get group institutional pricing rates.
The Rise of Target-Date Funds with Annuities
Target-date funds have become the primary delivery vehicle for these solutions because they already serve as the default retirement option for millions of US workers. At the end of 2025, target-date assets totaled more than $4.8 trillion, according to Morningstar, and Fidelity reported that 63% of participants on its platform held all their retirement savings in a target-date strategy. Target-date funds with annuities still represent a small slice of the market, but growth is accelerating. Assets totaled roughly $42 billion across 13 series at the end of March 2026, up nearly 70% from a year earlier.
The Two Types of Annuities You Meet in Target-Dates
There are two general types of annuities embedded in these strategies: income annuities and guaranteed lifetime withdrawal benefits. Each approaches the retirement-income problem differently, and each comes with its own trade-offs around two things that matter most to participants: how much access they retain to their money and how much it costs.
Income Annuities
BlackRock, Vanguard, and Nuveen all use versions of income annuities, though the mechanics differ. BlackRock gradually allocates participants into units that can later convert into guaranteed income. Vanguard and Nuveen use the TIAA Secure Income Account as the bridge to annuitization. In all cases, participants opting in exchange part of their savings for guaranteed lifetime payments. The appeal is straightforward: Retirees receive a predictable income and may be less dependent on portfolio withdrawals during market downturns, reducing sequencing risk early in retirement.
But the trade-offs are meaningful. Liquidity is the biggest. Once assets are converted into an annuity, participants generally lose access to that money for emergencies or large expenses. Inflation is another challenge because most payments are fixed and lose purchasing power over time. Costs can also be difficult to evaluate because they are embedded in payout rates rather than charged as explicit fees.
Guaranteed Lifetime Withdrawal Benefits
GLWBs, used by JPMorgan and AllianceBernstein, take a different approach. Participants remain invested and retain control of their assets while receiving a guarantee that they can withdraw a certain percentage annually for life, even if the account balance eventually falls to zero. The advantage is flexibility. Assets remain liquid, accounts can continue growing with market gains, and remaining balances can pass to heirs. Many GLWBs also lock in market gains through high-water-mark features that increase the future guaranteed income floor.
That flexibility comes at a cost. The often-explicit, high fees can approach 1% annually. Participants who never use the guarantee still pay for it. Withdrawal rates tend to be conservative relative to traditional income annuities. Participants can also accidentally reduce their guarantees by withdrawing too much in a given year.
The Challenges With Evaluating Target-Dates With Annuities
Regardless of the general type of annuity, both could help improve retirement spending in the right scenarios. But because individual factors, outside income sources, bequest motives, health, and risk tolerance vary widely across participants, plan sponsors face a genuine challenge in selecting a single solution for their entire workforce.
Plan sponsors have to evaluate whether fees are reasonable relative to the benefits provided, test how income guarantees hold up across different market and interest rate environments, assess insurer financial strength, and ensure participants clearly understand the product’s trade-offs. None of this requires becoming an actuary or insurance expert. It does require asking thoughtful questions and approaching the evaluation process with care and discipline.
The Bottom Line
Guaranteed income in retirement is an attractive proposition, but it's not without its pitfalls. Target-date funds with annuities offer a promising solution, but they're not a one-size-fits-all answer. Plan sponsors and participants alike must carefully evaluate the trade-offs and consider their unique circumstances before making a decision. Personally, I think that the key to navigating this complex landscape is to remember that the goal is to provide dependable income that lasts throughout retirement. Ultimately, that is the standard these products should be judged against.
