Different animals: In-plan vs. retail annuities

Key takeaways

• Annuity sales have been at record-high levels for four years in a row. Yet many people already have access to a better version in their retirement plans.
• Retail annuities are often more customizable, but in-plan annuities tend to cost less.
• Plan-based annuities can pool risk in a way retail annuities can’t, which can make them cheaper for employers and participants.

Annuities are getting a glow up. Americans are clamoring for reliable retirement income with a pension-like guarantee. Individuals bought nearly $115 billion of retail annuities at the end of last year, making it the fourth year of record-high sales.¹ Meanwhile, employers are adding annuities to workplace retirement plans at the fastest rate since target-date funds enjoyed their own coming-out party in the late 2000s. Next-generation target-date strategies that include fixed annuities are on the brink of becoming ubiquitous. Today, more than 1 million participant accounts use a target-date strategy that includes an annuity from TIAA—up 50% in only one year.²

For years, the conversation surrounding lifetime income has been shifting from whether guaranteed income in retirement is important (it is!) to how best to acquire it. Answering the latter is more complicated than you’d think—especially when compared with other, somewhat more-commoditized financial products. When mutual fund investors shop for, say, an S&P 500 index fund, they know what they’re getting with relatively minimal due diligence. The holdings are identical, by design, regardless of the asset manager. Fees matter, but these days the price difference often amounts only to the cost of a latte per $10,000 invested. Where the fund is held, be it a personal brokerage account or a workplace retirement plan, hardly matters.

1. In-plan annuities are simpler.

In the retail market, buying an annuity can be a bit like buying a new car—and not in a good way. Do I want the base trim or do I truly need the extra-durable factory-installed floor mats? Sure, they’d be nice if I go hiking every day, but am I really going hiking every day? Each option or trim package prompts another wave of introspection, and its value can be hard to discern.

The options offered by retail annuities, known as riders, are there to pique buyer interest and meet a wider range of needs. But they come with extra costs. A retail fixed annuity might come with a death benefit rider to pay for funeral expenses, or an inflation rider to protect against cost-of-living increases. A retail variable annuity might offer a guaranteed minimum withdrawal benefit (GMWB) rider, which guarantees return of 100% of premiums paid regardless of the performance of underlying stock or bond portfolios. Or it might offer a guaranteed minimum income benefit (GMIB) rider, which sets a floor or a minimum for payments to the annuitant during months when the underlying portfolios underperform.

For instance, the in-plan version of TIAA Traditional currently offers a competitive interest rate (also known as a crediting rate) in the 4.5% to 5.5% range on new money contributed through February 28, 2025. Unfortunately, there is no way to easily compare TIAA’s rates with those of retail fixed annuities, since annuities sold directly to the public are quite varied. Moreover, even if a retail annuity has a comparable rate, they almost always come with a sales charge—commissions not charged by in-plan annuities such as TIAA Traditional.⁴ Differences in rates and commissions also show up in the average payouts upon annuitization: The average monthly payout for a 65-year-old who annuitizes $100,000 in new money is 9% higher for TIAA Traditional than for the average single premium immediate annuity (SPIA)—$553 vs. $506.⁵ Unlike TIAA Traditional, the rate people get on a retail annuity is based on their sex, so that average could be higher for men and lower for women.

Why are costs lower and returns higher for in-plan annuities like TIAA Traditional? At TIAA specifically, one reason involves our nonprofit heritage and structure (more on that in moment). A more general explanation boils down to the advantage of being an institutional buyer: In-plan annuities are cheaper than retail annuities for much the same reason health insurance is cheaper through a workplace plan than buying it on your own. Groups have greater negotiating power and purchasing power. A workplace retirement plan for 10,000 employees will naturally have access to better deals and better pricing than an individual shopping on his or her own.

“TIAA is not selling these one at a time,” says Benny Goodman, a vice president and veteran actuary with TIAA Institute. “In the individual market, it can take a lot of hours for a broker to sell one annuity, and that broker has got to get paid.”

“We're not paying wholesalers. We're not paying outside advisors,” adds Mullery. “We have a yield that's generally better than everybody else’s because we don't have their distribution costs.”

3. In-plan annuities have better risk pooling.

Another reason in-plan annuities, TIAA Traditional in particular, have lower expenses and higher rates involves how well a company like TIAA knows its customers. Much like with group life insurance, in-plan annuities are tied to life expectancy. This is why monthly payouts for someone who annuitizes at age 70 will generally be higher than for someone who annuitizes at 65. Sure, there are some 70-year-olds who will live another 30 years—just as there are some 65-year-olds who will only live another five. That's where knowledge of the participants and the potential for outliers can help the annuity provider better manage risk and pass along the savings to employers and their employees.

“There are trends and tendencies, which means we can price the risk of the entire pool much better than that of one person walking down the street,” explains Tim Pitney, head of lifetime income default sales at TIAA.

4. In-plan annuities have (retirement plan) power.

Some of the benefits of in-plan annuities are universal to all in-plan investing: When plan participants save a little every month over many years in a 403(b) or 401(k)—as opposed to investing one lump sum at one time—they get exposure to many different market environments, which should smooth out their returns over time.

That said, there are annuity-specific advantages to the 403(b) and 401(k) style of saving. Because most retail annuities have minimum investments—sometimes up to $100,000—the save-a-little-bit-every-month approach is hard to replicate in the retail market. There are also additional advantages specific to TIAA Traditional. Whether a retiree purchases a retail fixed annuity or annuitizes their plan balance, the monthly payout is based on a fairly standard formula tied to interest rates and actuarial tables. However, long-time contributors to TIAA Traditional get more than the standard payout—sometimes up to 15% more—thanks to the TIAA Loyalty Bonus^SM. The more years you’ve contributed, the bigger your bonus.

“TIAA has a nonprofit heritage, which means we return profits to participants,” explains Brenda St. Arnaud, TIAA’s managing director for fixed annuities product management. TIAA shares profits three ways: by adding additional amounts to the stated crediting rate while saving; by adding additional amounts to the stated payout rate after annuitizing; and via the Loyalty Bonus, which can increase the payout in the first year of retirement.

Then there are the tax advantages associated with in-plan investing. Retail annuities do allow investors to defer taxes on earnings. However, employees contributing to an annuity in a typical 403(b) or 401(k) get more bang for their buck because they are using pretax dollars. For an employee in the 32% federal tax bracket, a $68-a-month, pretax contribution to CREF or TIAA Traditional would be the equivalent of $100 using after-tax dollars.

The advantages of contributing within a Roth 403(b) or 401(k) are different but still substantial. While the contributions are made with after-tax dollars, any withdrawals and monthly payouts taken after age 59½ will be tax free. Says Goodman, “Owning an annuity in a Roth account is one of the few ways to generate guaranteed income in retirement that is completely tax free.”