Fiduciary Risks for Plan Sponsors Adopting Guaranteed Income Annuities in 401(k) Plans

Guaranteed Income Annuities in 401(k) Plans is A Big Commitment

As of April 2025, with market volatility shaking confidence in traditional retirement strategies, plan sponsors are increasingly eyeing guaranteed income annuities to bolster 401(k) offerings. But for plan sponsors, integrating these annuities into a 401(k) isn’t a simple plug-and-play decision. Because of the guarantees and the complicated nature of such products, they are more difficult to choose and much more difficult to change that the investments currently offered in most 401(k) Plans. Simply put, adding Guaranteed Income Annuities to a 401(k) Plan is arguably closer to a marriage relationship than the one they may have with other investment providers or even their recordkeeper.

Under the Employee Retirement Income Security Act (ERISA), 401(k) Plan Sponsors bear fiduciary duties to act prudently and solely for participants’ interests—a responsibility that introduces significant risks when adopting complex insurance-backed guaranteed income annuities. Here’s a look at those risks and how sponsors might navigate them.

The Fiduciary Duty Landscape

ERISA mandates that 401(k) plan sponsors act with care, skill, and diligence, prioritizing participants’ and beneficiaries’ interests above all else. This includes selecting and monitoring investment options, ensuring fees are reasonable, and diversifying to minimize large losses. Adding guaranteed income annuities triggers these duties in new ways, as sponsors must evaluate not just market performance but insurer stability, contract terms, and participant outcomes. The SECURE Act of 2019 and SECURE 2.0 of 2022 eased some legal hurdles, offering a “safe harbor” for annuity provider selection, but fiduciary exposure remains a top concern.

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Key Fiduciary Risks

1. Insurer Solvency Risk

Guaranteed income hinges on the insurer’s ability to pay—decades into the future. While the SECURE Act shields sponsors from liability if an insurer fails, provided they follow a prudent selection process, that process is no cakewalk. Sponsors must assess the insurer’s financial strength (e.g., A.M. Best ratings), claims-paying history, and long-term viability. Picking a shaky provider could still spark participant backlash or litigation if guarantees falter, even if the sponsor avoids direct legal blame. A 2025 market downturn amplifies this worry—insurers aren’t immune to economic stress.

2. Fee Reasonableness and Transparency

Annuities often carry layered cost that are often opaque compared to current 401(k) investments. ERISA demands that fees be “reasonable” for the value provided, but benchmarking annuity costs against mutual funds or target-date funds (TDFs) is tricky. Hidden or poorly disclosed fees could invite Department of Labor (DOL) scrutiny or participant lawsuits, especially if high costs erode returns compared to simpler alternatives.

3. Suitability for Participants

Not every participant needs or benefits from guaranteed income. Younger savers, far from retirement, might overpay for insurance features they won’t use for decades, while retirees seeking liquidity could chafe at an annuity’s restrictions. ERISA’s prudence standard requires sponsors to ensure offerings align with the plan’s demographics and goals.

4. Complexity and Oversight Burden

Annuities are intricate, with bonuses, growth rates, and withdrawal rules that defy easy explanation. Sponsors must monitor these products ongoingly—beyond the initial selection—ensuring terms remain favorable and insurers stay solvent. This demands expertise many small- to mid-size sponsors lack, raising the risk of oversight lapses. A 2017 Plan Sponsor Council of America survey pegged fiduciary exposure as the top barrier to annuity adoption, a sentiment echoing into 2025 as complexity grows.

5. Portability and Lock-In Challenges

If a sponsor switches recordkeepers or discontinues an annuity option, participants might face portability hurdles. Pre-SECURE Act, annuities often couldn’t transfer between plans, forcing liquidation and penalties. While newer rules ease this, not all annuities are fully portable, and contractual lock-ins with insurers could penalize sponsors for exiting. This inflexibility could clash with ERISA’s duty to adapt to participants’ evolving needs.

6. Litigation Risk Despite Safe Harbor

The SECURE Act’s safe harbor protects sponsors who prudently select annuity providers, but it’s not a free pass. Participants or regulators could still sue over perceived missteps—say, picking an insurer with red flags or failing to disclose fees adequately. Courts have held sponsors liable for fiduciary breaches in other contexts (e.g., excessive fees), and annuities’ novelty in 401(k)s could draw legal tests. A volatile 2025 market might fuel such claims if participants feel shortchanged.

Mitigating the Risks

Sponsors aren’t defenseless. Here’s how to tread carefully:

- Delegate to Experts: Hire a 3(38) investment manager to assume fiduciary duty for selecting and monitoring annuity providers. This shifts some liability off the sponsor, leveraging specialized expertise.

- Robust Selection Process: Document a thorough due diligence process—review insurer ratings, financials, and contract terms. The DOL expects evidence of prudence, not just compliance with safe harbor steps.

- Fee Benchmarking: Compare annuity costs to alternatives, ensuring participants get value. Transparency in disclosures is non-negotiable—participants must understand what they’re paying for.

- Participant Education: Offer clear guidance on how annuities fit into retirement planning. TIAA’s 2024 survey found 43% of sponsors balk at annuities due to “lack of understanding”—education bridges that gap, reducing suitability risks.

- Oversight Committee: Form a dedicated 401(k) committee with HR, legal, and finance reps to monitor annuity performance and insurer health, spreading responsibility and enhancing diligence.

- Flexibility Options: Favor annuities with portability and withdrawal flexibility to avoid locking participants in.

The Balancing Act

Guaranteed income annuities address a real need—93% of sponsors in MetLife’s 2025 study say retirees crave income they can’t outlive. But fiduciary risks loom large: insurer failure, fee disputes, and participant mismatch could turn a well-intentioned move into a legal or reputational mess. Sponsors must weigh these against the upside—stability for retirees versus potential pitfalls for the plan.

The Bottom Line

Adopting annuities in a 401(k) isn’t a leap of faith—it’s a calculated step requiring vigilance. The SECURE Acts cut some red tape, but ERISA’s fiduciary bar remains high. Sponsors tempted by guaranteed income must arm themselves with expertise, transparency, and a bulletproof process. In 2025’s uncertain climate, the allure of certainty is strong—but so are the stakes. Consult an advisor, lean on data, and prioritize participants. That’s the fiduciary way forward.

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