After confirming that target date funds with income options count as qualified default investment alternatives in retirement plans, TIAA has moved ahead with the product.
On Wednesday, the investment giant introduced Custom Default Solutions for 403bs, “a guaranteed income component through a custom target-date model structure, or by a model portfolio constructed to deliver a target level of income.”
The custom solutions are Target Date Plus Models and Target Income Models, which it says are a complement to the TIAA-CREF active and index Lifecycle Funds.
Plan sponsors and/or their third-party consultants develop the models (selection of investment options and glide paths) and assign participants to the models using TIAA’s recordkeeping platform.
The company sought clarification, which it received in late December, about the use of annuities and similar products in target date portfolios.
The DOL stated that subject to certain provisions, “it is the view of the Department that a fiduciary of a participant-directed individual account plan could, consistent with the provisions of Title I of ERISA, prudently select an investment with lifetime income elements as a default investment under the plan if it complies with all the requirements.”
As TIAA notes, guaranteed components in target date funds come at a critical time for participants. According to the National Center for Health Statistics, the average life expectancy of a 65-year old increased by 18 percent between 1980 and 2013—from 16.4 to 19.3 years.
At the same time, defined-contribution plans have replaced defined-benefit plans as the primary retirement savings vehicle for most Americans, placing the responsibility of saving and planning for lifetime income squarely upon plan participants. It’s resulted in recent guidance from government regulators encouraging plan sponsors to consider lifetime income solutions and annuities.
Retirement plans often include target-date funds which simplify the investment decision-making process for employees but, despite common belief, do not provide guaranteed income in retirement.
In addition, many defined-contribution plans focus on account value and rates of return, rather than creating a sustainable and secure stream of retirement income.
“To date, most target-date funds do a good job helping participants accumulate retirement savings,” said Ron Pressman, CEO of TIAA Institutional Financial Services. “However, they don’t provide guaranteed lifetime income in retirement, which can leave many with the tough task of stretching a lump sum of retirement savings over the course of a retirement that potentially could last decades.”
TIAA research has found that 49 percent of Americans say their retirement plan’s No. 1 goal should be to provide guaranteed monthly income in retirement, but 41 percent are unsure if their current plan provides an option for lifetime income.
Custom Default Solutions include two options:
Target Date Plus Models substitute standard bond funds with a guaranteed fixed annuity, such as TIAA Traditional, that provides certainty of income, within the familiar target-date structure. These models typically follow the automated glide path many participants expect. However, plan sponsors and their consultants can use their own in-house expertise to manage the glide path and investment options to fit the specific demographics of their participants.
Target Income Models aim to replace a specific portion of income in retirement using the same investment approach of many defined-benefit plans: a liability-driven investment (LDI) strategy.
Participants are moved among multiple glide paths based on their personalized funding ratio, income replacement goal and market conditions. The models in this solution become more conservative over time, similar to target-date funds.
However, Target Income Models balance growth assets with income-hedging assets, primarily through Treasury Inflation-Protected Securities (TIPS) to lessen the impact of interest rate and inflation risk on retirement income.
Leveraging the work of Nobel Prize winner Robert C. Merton, TIAA licensed the framework from Dimensional Fund Advisors.
“As retirement plans continue to evolve to meet the needs of today, we believe Target Date Plus Models and Target Income Models both represent important options to help plan sponsors, consultants and participants accomplish their retirement income goals,” Pressman concluded.
Correction: The post originally and incorrectly stated the new products were for 401(k)s. It has now been updated to reflect that they are for 403(b)s only.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
