It may be more common than not for target-date funds to have an embedded annuity as a retirement income option in the next five to 10 years, according to panelists speaking at the 2024 PLANSPONSOR National Conference on Wednesday.

The panel was made up of two proponents of the space—a provider and newly named head of the Institutional Retirement Income Council—and an independent plan adviser. All made the case that a need in the U.S. for a pension-like distribution option for the 401(k) system along with regulatory support will lead to the majority of TDFs in the next decade having an embedded retirement income annuity option.  

“Participants already think some kind of guaranteed income is built in it their plan,” said Sean Bjork, head of Bjork Asset Management. “My gut is that we will end up with some hybrid solution where the annuity stream is treated like any other asset class.”

Retirement income management for participants is widely seen as a problem for America’s 401(k) system, which relies on automatic enrollment and “set-and-forget-it” investments dominating the fund pool. Distribution, however, is most often left to participants, with just 6.7% of plan sponsors offering an in-plan annuity option, and another 26% offering them via a managed account service, according to the 2024 PLANSPONSOR DC Benchmarking survey.

Meanwhile, a mix of insurers and asset managers in recent years have been flooding the market with TDFs with an annuity element including AllianceBernstein LP, BlackRock Inc., Income America LLC, State Street Corp. and TIAA/Nuveen.

Adviser Bjork believes some of those TDFs with an annuity sleeve that kicks in when a person is further in their career will become standard as a qualified default investment alternative. Further, he sees the payout being automated at a certain percent unless participants decide to opt-out or take a different path.

“We’ve done so well with the accumulation phase,” Bjork says. “But we have not been able to solve for the decumulation phase, and I see this happening to provide people a regular paycheck [along with Social Security].”

Brendan McCarthy, head of retirement investing for Nuveen, also sees a handful of TDF products like the one his firm offers leading the space within the next five to ten years. When it comes to the payout, however, he believes it will remain an opt-in situation for near retirees, who will need to consider it alongside Social Security and other assets.

“The majority of TDFs will be income-target-date funds in the next five to ten years—but you are likely not doing the income automatically,” McCarthy said. “You will be steered toward that income option automatically, but you still have that option of whether you want to ‘hit play’ on the income solution.”

McCarthy stressed that there is still a lot of education and communication needed around the option, but that providers and recordkeepers are improving in this area. Meanwhile, plan advisers and consultants are becoming more versed in the potential income option.

Product Here, Platform Needed

Both Fidelity Investments and Empower have recently made announcements about offering in-plan annuities, among other distribution options.

At least some insurance companies appear to be backing the push for institutional retirement plan annuities. In a separate study of annuity providers released Wednesday by Goldman Sachs Asset Management, the researchers found that 70% of 34 insurance companies surveyed now offer an in-plan income annuity solution.

“The data shows how US annuity providers are focusing on long-term goals and solutions, and balancing macroeconomic risks, to help drive retirement outcomes for underlying investors,” said Marci Green, head of retirement intermediary and insurance distribution of Goldman Sachs Asset Management, in a statement.

The report also emphasized the continued sale of retail annuities, which have been hitting records amid higher interest rates.

One stumbling block to the in-plan TDF products being available, the panelists at the PLANSPONSOR conference noted, is that recordkeepers will have to go through complex builds to make them available to plan sponsors.

“These are incredibly complicated to build,” Bjork told the audience of plan sponsors. “If you are in charge of a multi-billion-dollar plan, then you are in a good position to go in say, ‘this is the one I want.’”

Recordkeeper availability creates a further issue of portability, because if a participant is put into an annuity and then leaves their recordkeeper, it can’t travel with them unless their new recordkeeper can accommodate the product.

Kevin Crain, recently named executive director of the Institutional Retirement Income Council, noted that, with the biggest recordkeepers already starting the process, more will follow. They won’t only offer TDFs with annuities but provide a “suite” of offerings to plan sponsors to help participants with retirement income, in his view.

Meanwhile, he sees retirement income projection tools continuing to evolve to help retirees figure out a plan for retirement income.

Role for Regulators

Crain noted another key area for these offerings to take hold—continued regulatory support so plan sponsors and advisers will feel supported as fiduciaries. He referred to the push by policymakers in recent years via federal legislation for annuitizing within plans to try and address decumulation needs.

“Historically, retirement income options were not offered understandably because plan sponsors were asking, ‘What is my responsibility? There’s so much litigation out there, am I going to take this on in terms of adding an annuity?’” he said. “The government is sensitive to that, and they are trying to provide more relief and safe harbors in terms of somewhat lessening the responsibility on plan sponsors.”

Despite the bullish outlook, the panel acknowledged that “annuities” are still often seen as a bad word due to perceptions of higher fees, commission-based sales and lock-up periods.

McCarthy argued that these types of annuities differ in that they are institutionally priced and not being sold on a commission basis. He also noted that, if offered, they will be done so by providers, plan sponsors and consultants operating under the Employee Retirement Income Security Act.

“You do have as your fiduciary responsibility the obligation to look at the top providers,” he told the plan sponsors. “Regardless of what’s available from your recordkeeper you want to look at what is out there.”

The panelists also agreed that the industry was still in its early stages and will need to ramp up fast to meet the 5-to-ten year window.

“I don’t even think we’re in early innings, we’re still in batting practice,” Bjork said. “You can get out there and explore what is being offered.”