My $1.6 million retirement account has an automatic annuity clause if I die – what are my options?

For anyone who wants to make it one day in the FIRE (financial independence, retire early) world, there is often a question of how much you can take advantage of employer opportunities. Generally speaking, this revolves around 401(k) employer matching, which might be considered “free” money while employed. 

However, in the case of one Redditor posting in r/ChubbyFIRE, there is a question of what to do with a retirement plan with a hidden annuity clause. In this situation, the Redditor now worries that a good chunk of their net worth is tied up in something they don’t want and can’t get out of. 

The good news here is that the original poster has some kind of wealth to build on, but if it’s locked out, making good use of it anytime soon could be a major challenge. 

The Retirement Plan

With a $5 million net worth, the original poster is in a pretty good position to retire, which got him and his spouse looking at some of their accounts and ensuring everything was in proper order to call it quits. As part of this account review totaling $1.6 million, the Redditor noticed that on the T Rowe employer-sponsored account, one-half, or $800,000, was to be sold from its current S&P 500 investment into an annuity for the designated beneficiary upon his death. 

The Redditor immediately balks because the couple is not fans of annuity accounts, which prompts him to call T Rowe and ask for assurance that his wife will receive full account ownership. This could have ended the conversation until the Redditor reads the QPSA (qualified pre-retirement survivor annuity) form out loud to the customer service agent, leading to more questions. 

Without getting into details of the form, the bottom line is that the form says that 50% of the vested account balance is used to purchase an annuity to provide payments for life for the surviving spouse. You can waive the QPSA, but this would require the spouse to “consent in writing to the waiver.” 

Needless to say, the Redditor and his spouse do not want an annuity option and quickly find themselves in a position where they might not have control over around one-third of their total net worth. 

The Good News

Thanks to one of the commenters on this post, this issue was quickly resolved positively. One person indicated they had experienced a very similar provision in an E-Trade application after opening up a solo 401(k) account for their spouse. The caveat was that it was specific to Money Purchase Plans, which are generally known as pension-type plans with a fixed amount of company contributions. 

This led another commenter to wonder if the original poster wasn’t getting some of the language mixed up, as they posted QPSA language that indicated “vested benefits from your account in the Money Purchase Plan Source.” 

Unsurprisingly, an MPP and a 401(k) are not the same, but this language on the employer’s internal website doesn’t distinguish between these two account types. In other words, whoever set up this webpage didn’t consider this situation. The result of this website mixup is that the original poster assumed MPP and their 401(k) retirement account were somehow related, and within 24 hours, this entire issue was cleared up. 

The Final Answer

After receiving a call back from his employer’s retirement account customer help line, they realized that as his employer operates in 90 countries, the language on this internal retirement website is ambiguous and applicable to many different scenarios. 

In the original poster’s case, the Money Purchase Plan is relevant to other people working for the company, but not particularly for him. Ultimately, there is no issue here, and if something befalls the original poster before they leave the company, all of the $1.6 million in the retirement account would be immediately transferred to the wife as the designated beneficiary. 

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