The SECURE Act will provide a greater opportunity for target-date providers to incorporate annuities and other guaranteed income options into their products and find amenable sponsors, although sponsor adoption will take some time, according to Cerulli Associates, Boston.
In one survey, 34% of DC asset managers said it was "highly likely" that the next generation of target-date funds would incorporate an annuity component, while 54% said it was "somewhat likely," according to a December report.
The survey of 36 DC asset managers responsible for $4.5 trillion in DCIO assets didn't ask for a specific timeline; it only asked about "some point in the near future." The survey, conducted during the second quarter of 2020, also said 46% said it was "highly likely" target-date funds would incorporate a managed payout option and that 46% said such an option was "somewhat likely," but didn't offer a timetable.
"This won't be a sweeping change that happens over a short period of time," said Shawn O'Brien, senior analyst for the Boston-based research firm.
Adoption will be affected by, among other things, the need for record keepers to adjust their technology platforms to accommodate annuities and other lifetime income options.
Educating plan sponsors and participants on the mechanics, costs and benefits of these options "will be key to increased adoption," the report said.
Mr. O'Brien acknowledged that the "negative stigma" attached to annuities remains a hurdle for gaining participants' trust of in-plan annuities. Making these products simple and low-cost will enhance the chances of participant acceptance, he said.
In another Cerulli survey featured in the December report, 63% of target-date fund providers said recent market volatility will increase client demand for guaranteed income products, while 33% expected the demand to remain the same. This survey, also conducted during the second quarter of 2020, contained responses of 24 target-date fund providers with $2.4 trillion in target-date assets.
Mr. O'Brien said market downturns in general — not just the impact of the coronavirus — "could serve as a catalyst" for more target-date funds incorporating a variety of guaranteed income products.
Cerulli's report recommended that providers of lifetime income products "leverage market downturns to illustrate their downside protection benefits."
Among target-date managers that aren't offering guaranteed in-plan options, the report said 64% cited lack of sponsor demand as the top reason among 11 choices. Lack of demand from advisors or consultants (32%) placed second and lack of "sufficient" guidance from the Department of Labor placed third (27%). However, 32% said they were "considering allocating to a guaranteed component."
