The Arrival of TDFs with Annuities

With participants thinking erroneously that there is a guaranteed paycheck built into their retirement plan, the production of an “Income Target Date Fund” has grown exponentially. Since 2020, some target-date series now include a form of guaranteed income, providing participants with a more predictable future.

What is a TDF with an Annuity?

TDFs with annuities were created to provide a balanced investment strategy with lessened equity exposure as it approaches retirement (like any other TDF) while guaranteeing income over a period of time. It fosters investment growth while maintaining the security of guaranteed payments through retirement. This new approach addresses participant concern regarding outliving their savings. Advantages and drawbacks are:

Benefits

• Security for Participants: Guaranteed income provides financial security without exposure to market volatility and the risk of longevity.
• Simplified Choices: TDFs are already popular in retirement due to their “set-and-forget-it” nature, and adding a guaranteed income component eliminates further income concerns.
• Institutional Pricing: Intended to operate under ERISA, they can be cost-effective for participants since they are institutionally priced.

Challenges

• Portability: Lack of portability is a concern. If a participant changes jobs or recordkeepers, the new recordkeeper may not be able to offer the same annuity plan or an annuity at all.
• Perception: Annuities have been unattractive due to high fees. Participant education is vital. 
• Regulations: Designed to operate within ERISA, they require proper planning and management.

Despite the potential drawbacks, both Fidelity Investments and Empower have announced offering annuities in their retirement plan programs. According to a study by Goldman Sachs Asset Management, 70% of 34 insurers now offer an annuity option. The growth potential of a traditional TDF combined with the stability of annuities, the popularity of TDFs with an annuity element could catapult to the top of the retirement industry providing investors with guaranteed income, helping Americans save for the future.

Sources:

• https://www.plansponsor.com/will-most-tdfs-include-a-retirement-income-annuity-in-10-years/ 
• https://www.morningstar.com/retirement/target-date-funds-annuities-its-complicated 
• https://www.plansponsor.com/annuities-gain-steam-part-target-date-funds/ 
• https://www.plansponsor.com/plan-sponsors-retirement-income-thinking-has-evolved/ 

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