What You Need to Know
- 5ForLife was just introduced by American Century, Lincoln Financial, Nationwide, Prime Capital, SS&C, Wilmington Trust and Wilshire.
- The guaranteed income products increasingly being offered in the defined contribution space aren’t the same as those you may have seen in the retail space.
- TDF 2.0 does present some interesting challenges for plan sponsors around issues like product selection and benchmarking.
Things are starting to get interesting in the target date fund space.
Traditional target date strategies (1.0) were largely about getting participants to retirement with glide paths and fancy asset allocations. The latest approaches (2.0) are focused on getting participants through retirement by embedding some type of guaranteed income product in the later vintages of the target-date fund strategy.
To be clear, TDF 2.0 isn’t exactly new. Raytheon Company was one of the first companies to introduce a default investment that had an allocation to a guaranteed income product (technically a Guaranteed Lifetime Withdrawal Benefit approach) roughly a decade ago, but uptake and product development in the space has been relatively slow — until recently.
It seems the passage of the Setting Every Community Up for Retirement Enhancement, or SECURE Act, and other factors have ramped up innovation in the target-date fund space. For example, last month Nationwide and Annexus Retirement Solutions announced their “Lifetime Income Builder.”
And now we’ve got a new strategy that came out Wednesday called “Income America 5ForLife” through a consortium of (in alphabetical order) American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, and Wilshire. Exciting stuff!
I know what you’re thinking, is it really a good thing for participants to get an allocation to additional guaranteed income and does it really take seven companies to pull this off?
Note, I’m trying to avoid the word “annuity” because it’s ambiguous from a strategy perspective (most annuities today aren’t used to generate guaranteed lifetime income), and let’s be honest, there’s some serious baggage with the term.
Does the New Approach Make Sense?
Let’s start with the first question, around whether including guaranteed income in a target date fund is a good thing for participants. I’m not going to get too deep in the weds here but generating retirement income from a portfolio is pretty complicated and guaranteed income can simplify things.
I get that people aren’t necessarily clamoring for guaranteed income (especially “annuities”… gasp!). But participants weren’t exactly psyched about target-date funds a decade ago, and now it’s a $2 trillion-plus (and growing) category.
Most surveys find people like the idea of insuring their nest eggs, and that’s what guaranteed income does. The guaranteed income allocation is usually only a part of the overall portfolio, and the buy-in typically starts 15 years-ish from retirement; although it’s going to vary significantly by product.
Also, since it’s a default investment, participants can obviously opt-out if they don’t want it.
The guaranteed income products increasingly being offered in the defined contribution space aren’t the same products you might have bumped into the retail space either. These institutionally priced products typically have low fees, no surrender penalties, attractive payout rates, etc.
TDF 2.0′s Complexity
One issue with including guaranteed income as part of a target fund is complexity, which gets to the second question: what’s the deal with the seven companies in this new product?