It’s still early days for target-date funds with embedded annuities, according to Jason Kephart, director of multiasset ratings at Morningstar and author of a new report released April 9 on the specialty target-date funds.
“It’s very early innings. We haven’t seen a lot of demand yet,” he said, adding that the amount of assets in the new target-date novelty funds and those in traditional target-date funds is like “night and day.”
Morningstar estimates that there are less than $50 billion in the specialty target-date funds, or just under 2% of total target-date assets.
AllianceBernstein’s AB Lifetime Income target-date series, a target-date with embedded annuities, had approximately $10 billion in assets at the end of 2023, according to Morningstar’s report.
BlackRock is expected to be another big provider with its anticipated launch of the much-heralded LifePath Paycheck series later this month. More than a dozen plan sponsors have agreed to convert BlackRock’s traditional LifePath Index series to LifePath Paycheck, a move that would add roughly $25 billion in assets to the target-date specialty fund.
Participants in BlackRock’s traditional target-date series will be “mapped over as if it was any other kind of target-date switch,” Kephart said.
BlackRock in May 2020 announced that it was working with Equitable and Brighthouse Financial to launch LifePath Paycheck and in October 2021 publicized that it had persuaded five large plan sponsors, including Tennessee Valley Authority Retirement System, to add the product to their plan investment lineups.
The delay in making the product live likely had to do with coordinating with record keepers, according to Kephart.
“I think the record-keeping side had to catch up,” he said. "A lot of record keepers weren’t really set up to be able to handle the annuity part of it.”
Morningstar noted that Empower dropped annuities from its IncomeFlex Target series at the end of the first quarter because 401(k) investors were not allocating enough to the target-date to generate enough guaranteed income to make the option worth opting into.
The decision to make the IncomeFlex Target series a traditional target-date series comes on the heels of Empower’s announcement in March that it was launching a string of new guaranteed retirement income options, including a new target-date fund series with an embedded annuity featuring American Funds and TIAA’s Secure Income Account.
“Maybe they think that’s a better mousetrap,” Kephart said of Empower's new specialty target-date fund.
