Although participants report being satisfied with their TDF default investment option, a large number assume the TDF will provide lifetime income, which is “overwhelmingly not the case,” Seth Masters, chief information officer at AllianceBernstein, told PLANADVISER.
Lifetime income is, by a wide margin, the top thing participants want in a retirement plan, Masters said during a recent AllianceBernstein retirement forum. The irony is that whenever participants are given the chance to add an annuity, however, research shows that virtually none of them do.
Participants shy away from “traditional annuities” because they spur feelings of a loss of control, as well as the fear of insurance companies benefiting from a participant’s unpredictable lifespan. “The idea of losing that control is psychologically, unbelievably difficult for most people to agree to,” Masters said.
As a result, the lifetime income adoption rate is minimal if not made the default, Masters said, so the best solution is to marry the lifetime income solution with the TDF default.
Plan Sponsors Not Fully Utilizing TDFs
Plan sponsors are also satisfied with TDFs, but AllianceBernstein’s third biannual survey of plan sponsors found only about half of plans have made TDFs their default option. “That was a real shocker to us,” Masters said.
Of the 50% of sponsors offering a TDF but not using it as the default, 83% have no default or are still using a stable value fund, an equity fund or a bond fund—none of which are qualified default investment alternatives (QDIAs)—as the default (see “Plan Sponsors Not Making Best Use of TDFs”).
Masters thinks more plan sponsors have not adopted TDFs as their default for two reasons: The idea of QDIAs is relatively new so many plans do not fully appreciate the benefits, and some plan sponsors do not realize the behavioral benefit of making it the default, which leads to higher adoption rates.
AllianceBernstein research also found that the majority of midsize and large-plan sponsors are failing to leverage their assets to provide more specialized or customized TDFs. According to the company’s survey, 22% of large-plan sponsors ($250 million or more in assets) and 21% of midsize plan sponsors ($1 million to $249 million in assets) reported that they have adopted customized TDFs; and 36% of large-plan sponsors said they have not adopted customized TDFs because they were unaware of the benefits of improved structure.
Earlier this year, United Technologies Corporation (UTC) launched Lifetime Income Strategy, which is the default investment option designed by AllianceBernstein that combines the simplicity of a target-date fund (TDF) with the security of lifetime income. The Lifetime Income Strategy is an age-based default investment option through which each DC plan participant has access to a target-date portfolio built specifically for them (see “Default Investment Option Addresses Longevity Risk”).
“I think that the wave of the future in the large-plan market is custom TDF structure,” Masters said.
In the small and midsize markets, Masters said TDF customization will likely not catch on because customizing a TDF is less cost-effective for smaller plans. However, he said “there will be lifetime income options available really across the whole gamut of plan sizes.”