A new wave of target date funds featuring annuities are here, and the question of whether this combination has the potential to be the “easy button” for retirement income is explored in new research this week from Morningstar.
In “Target Dates and Annuities… It’s Complicated,” Morningstar’s Jason Kephart and Samantha Lamas along with contributor Spencer Look examine how some target date providers are looking to succeed where others have fallen short by including annuities within TDFs to hedge against the very real fear Americans have of running out of money in retirement.
The researchers note at least 10 target-date series incorporating some form of annuity have launched since 2020. BlackRock will launch a new series this April, with about $25 billion committed from over a dozen defined-contribution retirement plans.
“Although investor interest has been relatively muted to date (comprising less than 2% of target-date assets), we think BlackRock’s new series—slated to launch this month—will make a splash in this space,” wrote Lamas and Kephart in an April 9 article about the research on Morningstar.com.
Indeed, BlackRock CEO Larry Fink highlighted the launch of LifePath Paycheck in his much-covered 2024 Annual Chairman’s Letter to Investors. “As I write this, 14 retirement plan sponsors are planning to make LifePath Paycheck available to 500,000 employees. I believe it will one day be the most used investment strategy in defined contribution plans,” Fink said in the letter.
Most of those sponsors are converting from BlackRock’s LifePath Index series, which is identical to LifePath Paycheck, until the latter starts building up a guaranteed income allocation around 10 years before retirement.
“We’re talking about a revolution in retirement. And while it may happen in the U.S. first, eventually other countries will benefit from the innovation as well. At least, that is my hope,” Fink continued. “Because while retirement is mainly a saving challenge, the data is clear: It’s a spending one too.”
Pretty heady stuff from the head of the world’s largest asset manager.
Upon its launch, BlackRock’s LifePath Paycheck is expected to immediately surpass AllianceBernstein’s AB Lifetime Income ($10 billion at the end of 2023) to become the asset leader among target-date series with annuities available in the marketplace.
Why annuities in TDFs
If the retirement industry is serious about growing in-plan guaranteed income solutions to help retirees with the issue of decumulation, TDFs have to play a big role because, as bank robber Willie Sutton famously said, “That’s where the money is.”
Morningstar notes that at the end of 2022, 98% of DC plans used target dates as their qualified default investment option, citing Vanguard’s 2024 How America Saves report. It found 83% of participants use a TDF when offered. At the end of 2024, TDFs had a record $3.5 trillion in assets, according to Morningstar’s 2024 Target-Date Strategy Landscape.
The new Morningstar research takes a deep dive into the new wave of target-date strategies trying to make the transition from saving to spending easier by including annuities as part of their glide path.
At their most basic level, the authors note these new TDF funds substitute a portion of a person’s portfolio that is usually reserved for fixed income with an annuity—either an income annuity, which provides a steady stream of cash flows, or a savings annuity, which focuses on accumulating an account balance.
The TDFs including guaranteed income are intended to simplify the process. For investors who plan to annuitize some of their assets, this package deal eliminates having to sort through myriad complicated options. Providers choose the type of annuity, which varies by series, and do the due diligence on insurance companies.
The annuity portion helps curb in spending, automates payments, and provides a steady paycheck for those who prefer a smooth income.
Biggest hurdle: Education
The researchers pointed to education being the main hurdle to these products’ success. They note that Empower has already introduced and after Q1 2024 subsequently dropped annuities in target-dates (Empower IncomeFlex Target series) because of poor investor response.
“Empower found that 401(k) investors were not allocating enough to the target-date fund to generate enough guaranteed income to make the option worth opting into,” the Morningstar research states. “This highlights that the biggest hurdle of these strategies is the lack of education.”
In the article, Lamas and Kephart note that target dates with annuities are promising, “but they aren’t the ‘set it and forget it’ solution that target-date funds are for retirement saving.” Despite the promise, “they may not be the right solution for all retirees. Many investors may still need the help of expert advice or technological solutions to make retirement-income decisions.”
Click here to access the full report, “Target Dates and Annuities… It’s Complicated”
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