Target-date fund providers are trying to separate their innovations from the rest of the pack via products in which annuities are embedded in the target-date series, providing guaranteed income to participants.
Several providers have entered the market since late 2021 — one as recent as earlier this month — all dealing with the common defined contribution industry behavior of sponsors not moving quickly to embrace new products.
Sponsors are taking a "cautious approach," citing questions about such issues as cost, the type of annuity and participant acceptance, said Patrick Wisdom, the Chicago-based vice president and associate defined contribution consultant for Callan LLC. "It requires a lot of education."
The most recent annual Callan survey of DC sponsors, published in March, reveals little interest so far in a target-date fund containing an annuity component. Ninety-nine sponsors responded to an online survey conducted in late 2022.
When asked if they had taken action last year or planned action this year regarding a target-fund, no one mentioned embedded annuities or other guaranteed income provisions among the nine choices,
When asked specifically about retirement-income solutions, only 5% cited a target-date solution as having been in place before 2022. Ninety-five percent said they had no plans for this strategy. The survey offered 10 choices and multiple answers were allowed.
Cerulli Associates' Shawn O'Brien said he has talked to several large sponsors about reviewing the embedded target-date approach. "My question: If they are interested, will they implement it?" said Mr. O'Brien, the Boston-based director of retirement and data analytics.
"And if they implement it, what percentage (of participants) will annuitize?" he added.
The newest entrant to the marketplace is Nuveen, the investment manager for TIAA-CREF, which unveiled its extension of an existing target-date series last week.
Nuveen embeds a deferred fixed annuity within three CIT target-date strategies: passive management, active management and an active-passive blend. The fees depend on the strategy: 2 basis points for the index series; 16 basis points for the active-passive blend; and 27 basis points for the active management approach.
A standard TIAA index-based CIT target series charges 8 basis points. The cost is higher than the passively managed Nuveen Lifecycle Income series because there is no management fee for the embedded annuity, a spokeswoman wrote in an email. A TIAA mutual fund-based passively managed target-date series charges 10 basis points for its institutional share class, she said.
The trustee for these CIT target-date funds is SEI Trust Co. It is the "ultimate fiduciary authority" over the management and investments made in the CIT series with Nuveen serving as an adviser, an Aug. 8 news release said.
A portion of the target-date funds' fixed-income component can be allocated to the annuity at any age, Brendan McCarthy, Boston, senior managing director and head of retirement investing at Nuveen, said in an interview.
"The driver for this was the demand by advisers who were using a custom target date over our record-keeping platform," he explained. TIAA has offered custom target-date funds with an embedded annuity for more than five years. The custom business has $22 billion in assets under management covering plans with 250,000 participants. Nuveen's total target-date AUM is $85 billion.
"We have a number of consultants with commitments to move their clients" into the annuity-embedded target-date series, said Mr. McCarthy, who declined to discuss clients.
BlackRock Inc. introduced its LifePath Paycheck target-date series in October 2021, the product of four years' research. It's a CIT with an embedded annuity backed by two insurers, Equitable Holdings Inc. and Brighthouse Financial Inc.
Twelve large plan sponsors, representing approximately $25 billion in target-date assets and more than 500,000 participants, are working with BlackRock, although none has yet implemented the product, a spokeswoman wrote in an email.
BlackRock's LifePath Paycheck is designed as a qualified default investment alternative — employees can opt out. It looks the same as BlackRock's LifePath Index series until a person reaches age 55.
Then it starts allocating a "lifetime income unit asset class," which is the source of future annuitization. These units are allocated through age 65 at which time they represent about 30% of assets in the fund.
Participants can start annuitizing at age 59½ by exchanging the lifetime income units into annuity contracts from the insurers. If they don't annuitize, the units remain in their accounts to generate a return similar to fixed income.
Before participants start allocating money to the lifetime income units, the cost is 9 basis points. Once they start purchasing these units, the cost can be as high as 16 basis points.
Capital Group Cos., Los Angeles, the provider of American Funds, has joined with several other companies to offer the NCIT American Funds Lifetime Income Builder Target Date Series, a CIT-based target-date fund with an embedded annuity.
Announced in 2021 and having filed an offering memorandum in April 2022, the collaboration includes Nationwide Mutual Insurance Co., Columbus, Ohio, and Annexus Retirement Solutions, Scottsdale, Ariz. Global Trust Co., Woburn, Mass. is the trustee. The target-date series offers a group fixed indexed annuity. At around age 50, the target-date series begins allocating assets to the annuity, according to a frequently-asked-questions document from the companies. At a participant's retirement age, this investment automatically generates 6% of a person's retirement assets annually. The allocation to the annuity comes from both equity and fixed income.
If the equity component falls to zero, the annual income guarantee from Nationwide becomes 4.5%. If participants aren't ready to take an income distribution at the retirement date, they can reallocate the money to another investment option within their plan or keep it in the target-date fund.
The cost, the document said, depends on the plan's size. The net expense ratio for this actively managed target-date series will range from 42 basis points when assets are allocated to traditional equity and fixed-income investments to 81 basis points when income distributions begin. The assumption by the companies is that this option will be a qualified investment default alternative, said Craig Duglin, the Los Angeles-based head of product management, intermediary-sold at Capital Group. Participants may opt out.
The companies chose a CIT-based target-date series due to pricing flexibility and greater design efficiency, he said.
Mr. Duglin added it would take three to five years for the companies to assess market acceptance and to make any adjustments if necessary.
Sponsors are "curious" but cautious, he said. Although "they don't want to be left behind," he added, "they are waiting for their peers."