After a decade of patient waiting, providers of target-date funds with built-in annuities may finally be getting a little love.
Take The Kraft Heinz Co. The multinational food retailer this year will be exploring how TDFs with embedded annuities compare with its own and other traditional TDFs to see if it makes sense to add them to the investment menus of its two 401(k) plans, which jointly hold $3.7 billion in assets.
“There has been a lot of exciting innovation and growth in this space over the last few years, and I believe plan sponsors are doing their participants a disservice if they aren’t at least spending the time to get to know what options are out there,” said Michael Jabs, associate director of pensions at Kraft Heinz.
Jabs reflects what advisers and consultants say is a greater openness among plan sponsors to specialty target-date funds that help participants create guaranteed lifetime income streams from their retirement savings once they leave the workforce.
Emily Wrightson, a principal at CAPTRUST Financial Advisors, reports that target-date funds with embedded annuities are becoming “a bigger and bigger talking point of conversation” among plan sponsors, especially those that sponsor government and higher-education plans where employees either don’t pay into Social Security or don’t have access to a defined benefit pension plan.
Concerns over participants not having any guaranteed sources of retirement income — either through Social Security or a pension plan — are driving “a lot of conversation and questions” around target-date funds with embedded annuities, she said.
Joe DeBello, a managing principal in the retirement and wealth division of OneDigital Investment Advisors, also reports greater receptivity to the products. While plan sponsors are “not beating down (its) doors to add in-plan income solutions,” they show “genuine interest in exploring more” about them once brought to their attention, DeBello said.
“It’s something that I think many advisers, including our own teams, are bringing to the attention of plan sponsors, and there is some interest in learning more,” he said, referring to target-date funds with built-in annuities. “I do think that this is something that we are going to see some uptake from the plan sponsor perspective.”
Holly Verdeyen, U.S. defined contribution leader at Mercer, is also bullish on target-date funds with guaranteed income features, predicting that guaranteed income products will be “the next auto feature” in workplace retirement savings plan.
“We do believe we’re going to get to the environment where we have automatic income,” she said. “Defined contribution plans have more options than ever to implement retirement income in their plans, and now it’s just a matter of determining what solution or solutions are most appropriate for their plan demographics and participant behaviors.”
Target-date funds with embedded annuities have been around for more than a decade but haven’t taken off because the market was small and the products weren’t flexible, CAPTRUST’s Wrightson said.
In 2020, when working with a client on finding a suitable target-date fund with a guaranteed income sleeve, Wrightson looked at a robust 20 different products.
“There’s even more now than just those 20,” she said.
Today, all the major record keepers, including TIAA-CREF, Empower Retirement, Fidelity Investments and Voya Financial, offer a target-date fund with an embedded annuity, as do asset managers like J.P. Morgan Asset Management, BlackRock and AllianceBernstein.
The latest iteration of products offer more flexibility and come in a variety of different flavors as they’re tied to different kinds of annuities. Some are linked to deferred fixed annuities and deferred income annuities, while others are attached to annuities that offer guaranteed minimum withdrawal benefits. Still others are connected to qualified longevity annuity contracts or QLACS.
TIAA, for example, offers a target-date fund with an embedded allocation to a guaranteed fixed annuity that can be converted into a lifetime stream of income at retirement. AllianceBernstein, in contrast, provides a target-date fund with customizable features that allows participants to buy into an annuity offering guaranteed lifetime withdrawal benefits.
“Once you hit age 50, you have the opportunity to start securing retirement income over 15 years,” CAPTRUST’s Wrightson said of the AllianceBernstein product, explaining that it gives participants the flexibility to “dial up or dial down” how much they want to annuitize.
The plan sponsor might default participants to purchasing say 50% of their target-date balance, but participants can then go and “pick that up, pick that down or turn it off,” Wrightson said.
Despite the greater flexibility and availability of the products, challenges nevertheless remain.
OneDigital’s DeBello worries that record-keeper “plumbing” for the specialty target-date funds they offer may not yet be ready to give participants the user experience they need to make decisions about whether, how much and when to annuitize. “These are all really important decision-making points that an investor would have and there’s just not a lot of technology built around this to support it,” DeBello said.
DeBello added that while many record keepers are “working to build out some of that infrastructure,” they nevertheless have competing priorities, such as implementing changes required under the Secure 2.0 Act of 2022, a massive package of legislation to improve retirement savings in the country.
“I don’t envy record keepers right now,” he said.
The products also present employers with what DeBello describes as a complex “decision tree” that they may not be able to navigate easily.
Apart from deciding whether to make the target-date fund with an embedded annuity the default investment option, they need to decide which type of annuity product is the right fit for their population and whether or not to offer just the target-date fund with an embedded annuity or both the specialty target-date fund and the traditional one.
DeBello phrases the question facing employers this way: “Are we going to offer one-and-done with only income or are we going to offer both options?”
“It’s going to be a really multistep process,” DeBello said. “I know a lot of the providers out there are working diligently to help create frameworks for employers to document the decision-making process to help them really narrow down the various choices based on their participant landscape and come to a decision around which of these are going to be the best fit for their population.”
Like other advisers and consultants, DeBello nevertheless believes that the products will gain traction.
“I know that many of the plan sponsors that we’ve talked to about this have indicated that they want to learn more,” he said. “My fear is that we may be able to get employers to a decision on whether or not to include this type of solution in their plan faster than their platforms are ready to accommodate them.”
