Data & Research April 9, 2024

Evaluating a Retirement Income ‘Easy Button’

Morningstar researchers delve into the promise, and difficulties, of target-date series investment options with annuities.

Reported by

A report released Tuesday by Morningstar Inc. asks the question: “Can a new wave of target-date strategies be the easy button for retirement income?”

In a review of the market of relatively new TDF products designed with annuity distributions, Morningstar researchers concluded that, while the products have potential to help in retirement saving and decumulation, uptake will require both education and communication among participants.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The investment data and analytics researchers acknowledge the need for saving decumulation management with the number of retirees expected to “skyrocket” in coming years. They noted, as TDFs have become one of the most popular savings accumulation options, the investment industry in recent years has leaned into a “new wave of target-date strategies that try to make that transition easier by including annuities as part of their glide path.”

ince 2020, at least 10 target-date series with some form of annuity have been launched, according to Morningstar estimates, which includes  BlackRock Inc.’s launch of a new series this April with about $27 billion committed from over 14 plan sponsors.

Products, however, are not equivalent to market share, the researchers note. They estimatedtotal assets in TDF vehicles with annuities to be less than $50 billion in a TDF market that stood at $3.5 trillion at the end of 2023.

“Annuities can help with many retirement spending decisions, but they still may not be the right choice for everyone,” wrote the research team led by Jason Kephart, director, multi-asset ratings, global manager research, for Morningstar. “Education remains these products’ biggest hurdle to success.”

In the report, Morningstar explained the potential benefits of annuities to guard against longevity and market risks, with positive aspects both for retirees who spend too much, or those who have the tendency to hoard savings unnecessarily. Even so, the firm noted the psychological roadblocks to many savers in purchasing an annuity.

“Despite annuities’ benefits, not many retirees purchase them,” the researchers wrote. “Past research has pointed to the complexity of annuities, their marketplace, and behavioral barriers to annuities, such as our tendency to loss aversion, regret aversion, and temporal discounting, as reasons for the takeup rate. Some retirees, for example, may see annuities as a gamble, since they can’t know for certain they will live long enough to spend all the money they put in an annuity. Others might be uncomfortable with some annuities’ lack of flexibility.”

Auto Potential

Morningstar wrote that, among providers, AllianceBernstein’s AB Lifetime Income has the most assets at about $10 billion at the end of 2023—more than doubling from $5 billion in 2021 after the passage of the original Setting Every Community Up for Retirement Enhancement Act of 2019, which created a safe harbor for employers offering an annuity within a 401(k), and also allowed for portability between 401(k) and 403(b) plans.

Morningstar predicted that BlackRock’s LifePath Paycheck series would surpass it after launching in April, though noting the full market will still be a “drop in the ocean of target-date assets.”

Morningstar goes on to lay out some of the target-date series with annuities available in the marketplace by type, including:

Target-Date Series

Annuity

Subtype

Insurers

AB Lifetime Income

Savings

Variable

Multiple

BlackRock LifePath Paycheck

Income

Fixed

Multiple

Income America 5forLife

Savings

Variable

Multiple

Lincoln PathBuilder Income

Savings

Variable

Single

NCIT American Funds Lifetime Income Builder

Savings

Fixed

Single

Nuveen Lifecycle Income

Income

Fixed

Single

SSgA IncomeWise

Income

Fixed

Multiple

SSgA Retirement Income Builder

Savings

Fixed

Multiple

Different Choices

Morningstar explained the different types of annuities, calling out income annuities, which provide a “guaranteed stream of cash in exchange for a lump-sum payment.” The firm noted that these annuities provide “priceless piece of mind for some,” but also have “downsides,” which include having income locked up that may be invested elsewhere, as well as purchasing power that may be eroded by inflation over time.

Another option is a savings annuity with a guaranteed lifetime withdrawal benefit, which doesn’t require investors to surrender control of their investments and may provide for more upside than income annuities. The GLWB option allows investors to withdraw a certain percentage of savings each year.

Morningstar also described the challenge for plan fiduciaries  to benchmark and address fee structures depending on the product. Income annuities, the researchers wrote, don’t have “an explicit fee” attached to them, making them harder to compare across products. Meanwhile, savings annuities are easier to compare costs as they have both explicit and implicit fees, but due to that they usually will appear “more expensive in almost all cases.”

The researchers ended on a positive note regarding the development of TDFs with a guaranteed income option.

“Our research shows that the industry is stumbling to catch up to this problem [or retirement decumulation]; though, its most recent efforts—target dates with annuities—show promise,” Morningstar concluded on a positive note concerning the products. “They automate investors’ asset allocations and payments in retirement. They also simplify the annuity buying process by providing only vetted annuity products to investors as well as avoiding advisor commission fees.”

Products & Services April 9, 2024

Partnering On In-Plan Advice

Recordkeeper Empower and two large RIA advisories discussed why they’re partnering on adviser-managed accounts geared toward plan participants of all asset levels.

Reported by

As retirement industry players seek ways to further customize 401(k) savings beyond the target date fund, a recordkeeper and two large retirement plan advisories say they view adviser-managed accounts as a promising option.

Representatives from Empower, OneDigital, and Sageview Advisory Group discussed what they see as the benefits and promise of the in-plan investment advice vehicle in a session held at the National Associations of Plan Advisers 401(k) Summit in Nashville on Monday.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Empower noted it started offering managed accounts solutions inside retirement plans via a partnership with Morningstar Inc. back in 2022. Then, about five years ago, it started partnering with registered investment advisories on adviser managed accounts; that offering now has about $28 billion in assets and 19 partner firms, with 5 more expected in 2024.

“Customized outcomes we think are the future—[the question is] how do you get there? And we think that you get there by partnering,” said Joseph Smolen, senior vice president, core and institutional markets for Empower. “The value that we bring comes from our employee communication and education and partnering with OneDigital and SageView and their boots on the ground doing the same.”

OneDigital and SageView, which both have retirement plan advisement and wealth management practices, are using adviser-managed accounts as a way to provide personalized advice for individuals who may not be working with or be able to afford a full-time financial adviser.

The participant connection starts, however, with financial education and communication with participants dealing with problems ranging from simple questions to whether they should up their deferral rates, or more complex issues such as estate planning, said Vince Morris, president, OneDigital Financial Services. 

“You’ve got to have some sort of communication and education platform,” Morris said. “We have created digital capabilities that can reach into the plans and connect with individuals.”

Education First

Jon Upham, president, head of institutional retirement at SageView Advisory Group, said his firm has seen increased interest from plan sponsors in recent years in offering a more customized participant offering.

“I think for a lot of years many of us in the adviser space were providing education and trying to work with plan participant at scale,” he said. “But I think all of a sudden the plan sponsor community is really ready to engage with us in this space, and what they always say to us is ‘how are you going to meet the needs of all the people in the plan and how are you going to provide this guidance that everybody is talking about?’”

Upham said that adviser-managed accounts is one method of doing that because it leverages technology to reach more people than they could with individual advisement.

When the audience asked about the additional fees of the AMA on top of 401(k) fees, Empower’s Smolen noted that it depends on the product provider and setup, with partner organizations potentially getting discounts from Empower’s offering as they are helping enroll and educate participants.

Morris said he views the AMA offering as “getting a wealth management service at institutional pricing.” He notes that, when an AMA is done correctly it can adjust to the “actual data points that is within the DNA of the investor.”

Upham added that the setup should come with additional services, such as the ability to speak with a financial coach and “comprehensive solution as opposed to just relying on the technology of the managed account structure” for the added fee.

The group also noted that other customized options are on the table depending on a participants need. Those include offering participants a self-directed brokerage account that they can partner with a financial adviser, as well as technology offered by companies such as Pontera, which connects financial advisers to an investor’s 401(k) assets for management.

Dynamic QDIA

All agreed, however, that their firms will continue to lean into AMAs as a customized option for large groups of participants.

Empower’s Smolen noted that the most popular structure Empower has is the dynamic qualified default investment alternative, in which a plan sponsor chooses an age when their participants are automatically put into an AMA when they are closer to retirement.

Morris said that the retirement industry is working on these personalized options amid one of the “greatest transfers of wealth in history” that will see many people seeking options for management of their 401(k)s and individual retirement accounts. Advisers, he said, are “in the right seat at the right time to help many, many people in different ways.”

Una Morabito, vice president sales and retention, large and NFP & PEO markets at Empower, noted research showing that 87% of retirement providers offer some kind of managed account, and 54% of plan sponsors offer them to their employees.

“It’s here and it’s here to stay,” she said. “This is a place where everybody needs to be comfortable and talking to your providers about how to help those plan sponsors with the customization that they are looking for.”

«