Can you provide a picture of the lifetime income option's role in DC plans? It's kind of like a Polaroid; we're still watching it develop. The products were introduced ... right at the beginning of the financial crisis, so sponsors had other issues to attend to. ... This isn't dissimilar from what we experienced when we first brought out the target-date funds. There was a similar reaction: “What is this? What is the problem that it's trying to solve? And how is it going to provide benefits?” As it became more apparent what it is, what it purports to do and what it actually does, what benefit it provides — then people get more comfortable with it.
But there's still hesitation in adopting lifetime income options in DC plans. Participants would have been better off if these products had been adopted early on. And I know some people say let's wait, but they say that without recognizing that there's a cost to waiting. There's a cost to adopting, but there's a cost to waiting, too, and I think we should be balancing those a little bit more.
Are participants more interested in lifetime income options within 401(k) plans than sponsors give them credit? Sponsors have been cautious. They have been deliberate, but I think they do understand the need of getting this in play. ... When we poll participants about what they want, they clearly indicate a preference for having this kind of option.
Is the target-date fund the most appropriate way for a lifetime income product to be incorporated into a DC plan? I think so. There are a couple of things that happen when you put the income option inside a target-date fund. You are not asking the participant to buy it at that point. You know that participants are comfortable with target-date funds. If we put the annuity into the target-date fund, it's something they don't have to decide: “What is this? How much should I buy? Is it a good price?” They know how to make those comparisons in the target date context.
Your annuity-wthin-the-401(k) product was introduced in October 2007 with the name SponsorMatch. You just changed the name to LifePath Retirement Income. Why? LifePath was the first target-date fund and enjoys a great reputation in the marketplace. We wanted to really get behind our target-date income product and put the full force of the LifePath name behind our effort there. We also wanted to make it very clear to the marketplace and the participants that this was a product that was focused on delivering lifetime income — retirement income.
Do you have any clients? No. We are where we were a few months ago. There has not been the take-up across the category (of annuities embedded in 401(k) plans) that people had expected. I would say that peoples' expectations were maybe a little high.
What's the problem? What we didn't anticipate was to what extent the financial crisis would take peoples' attention away from this. The demographics are clearly moving toward a louder expression of this need.
You have said the main stumbling block has been convincing sponsors that an annuity within the 401(k) can be implemented easily. How does your recent agreement with information technology company SunGard address this concern? Our new program with SunGard smoothes the implementation process by drawing on concepts that record keepers and participants understand and already use — namely, brokerage windows and the technology supporting discretionary managed accounts. LifePath Retirement Income — though actually multiple funds — will look like a single option and the participants will be automatically placed in the appropriate fund based on their age. At the age of 65, the fund then places the participant's annuity into their IRA — without the participant or the record keeper having to get involved in that process.
How has the integration of the BGI and BlackRock DC businesses worked? BGI was focused on the very large market; BlackRock had a small- to mid(size)-plan focus. We had a target-date to index fund capability; BlackRock had some concentrated active strategies. We had a CTF (collective trust fund) format; BlackRock had mutual funds. There's always a little anxiety and hesitation about these things, but the first time we all got in a room we started talking about the different things that we have. It happened so fast that we felt like we were one team. We're very happy with the transaction in that it increased our capabilities. ... I don't think we consider ourselves to be in transition anymore.
Have there been any strategy changes since you took charge? We're doing more custom target-date fund work. What's different now is that we can provide a wider range of active management styles. From an investment profile, that's been the biggest change.
Why don't participants save enough? I think the bigger problem with the DC market is the message that we implicitly send through the (corporate) match rates that if you're saving about 6% (per year) you're going to be fine. You probably need to be saving about 9%. We implicitly send along a message to the way the (corporate) match is used right now. That's comes back to the notion that everything sponsors do implies an endorsement; the match should be about 9%.
What role can your firm play in convincing sponsors to encourage greater savings rates among participants? The role of the provider is to bring thoughtful research on what the role plan design can serve, and that would include how the (corporate) match itself is used. We have an extended conversation with our clients about these kinds of issues. We're talking about plan design, about behavioral research, about the way target-date funds are used.