July 1, 2010

BlackRock Creates Target Date Fund That Morphs Into a Post-Retirement Annuity

New product designed for retirees with little money management experience

In response to retirement-age boomers' demand for lifetime income plus increased government concern about the impact of all those retiring workers on the U.S. economy, asset management giant BlackRock has developed a

401(k) target fund that morphs into a post-retirement annuity.

BlackRock, which pioneered the concept of target date funds in 1993 with its introduction of LifePath Portfolios, is betting that its new Target Date Income Fund annuity product will hit the sweet spot for employees who want to draw a lifetime monthly paycheck after they retire.

"We have reduced the psychological work of picking an annuity, because people don't like to have to pick it themselves. This target date fund is bought as a deferred annuity," said Chip Castille, head of U.S. and Canada defined contribution, during a breakfast at BlackRock's New York headquarters on June 29.

Also at the breakfast, government relations head Barbara Novick pointed to the U.S. Department of Labor's announcement of an upcoming public hearing that relates to lifetime income. That hearing comes on the heels of the department's December 2009 announcement that it will explore steps "to encourage the offering of lifetime annuities or similar lifetime benefits distribution options for participants and beneficiaries of defined contribution plans."

In 2008, target date funds took a beating and were down by an average of 22.5%, even for those with 2000-2010 target dates that are presumably conservative, according to Morningstar. As a result, Congress has increased its scrutiny over target date funds as well as retirement safety.

BlackRock's new Target Date Income Fund uses already-familiar target products and then offers 401(k) participants the option of putting as much as 50% of their money into an annuity. The idea, Castille said, is to get participants saving at the right levels--and because the annuity is treated as an asset class, the target fund can invest more aggressively because of the annuity hedge.

A recent online study of 1,000 401(k) participants performed for BlackRock by Boston Research Group, a private research firm headquartered in Hopkinton, Massachusetts, bolstered BlackRock's decision to market an annuitizing target date fund.

"We heard two clear messages from participants: First, saving for retirement is a top priority for them and, second, they are confused about how to turn retirement savings into retirement income," Castille said in a release announcing the survey results.

The BlackRock survey indicates that employee views about how long they plan to be in retirement and at what rate they can deplete their savings don't align. The survey findings show:

-- More than six of 10 plan participants believe they will live in retirement more years than they believe their retirement nest-egg will last.

-- Over half, 57%, of plan participants said they would prefer to receive a steady stream of income in retirement versus a lump sum payment.

-- The great majority of participants, 82%, said they had little or no experience in managing a sum of money over $100,000.

"When the vast majority of participants say they are not prepared to manage $100,000 or more, then how can we ask them to manage longevity risk or secure a stream of income on their own?" Castille said. "Participants are telling us they want income solutions in their 401(k) plan, and there's no question that providers and employers must create solutions that help employees achieve their objectives."

BlackRock, which employs 8,500 professionals in 24 countries, is a provider of global investment management, risk management and advisory services to institutional, intermediary, and individual investors around the world. As of March 31, 2010, BlackRock's assets under management total $3.36 trillion across equity, fixed income, cash management, alternative investment, real estate, and advisory strategies.

Read a story about BlackRock's 401(k) participant survey from the archives of InvestmentAdvisor.com.

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