Annuities Gain Steam as Part of Target-Date Funds

Cerulli retirement research shows consultants favor TDFs with guaranteed income for plan sponsors’ lifetime income options.

For plan sponsors considering an in-plan retirement income option, defined contribution plan consultants are most likely (68%) to recommend target-date funds with a guaranteed income component, followed by a TDF with an income vintage (50%), a new report shows.

The report this week from Cerulli Associates—U.S. Defined Contribution Distribution 2022: Tailoring Solutions to the Consultant-Intermediated Fiduciary Landscape—finds the target-date options were followed by a managed account (36%), as the next most likely recommendation from defined contribution consultants for in-plan retirement income offerings.  

“Consultants’ strong preference for target-date products with an embedded annuity may be, in part, a reflection of the sheer number of new target-date funds with embedded annuities available in the market today and plan sponsors’ comfortability with the target-date structure,” says Shawn O’Brien, associate director at Cerulli, in a press release.  

The Cerulli report also finds that 82% of asset managers agree that annuity products have a negative stigma because of cost, complexity, and/or limits on liquidity.

“Despite the recent proliferation of new guaranteed income products, asset managers are split on whether an effective retirement-income solution requires a guaranteed component,” the report states.

Although there is an understanding among retirees and consultants of the need to secure retirement income, individuals’ preferences vary widely, further complicating the task for adding in-plan guaranteed options, Cerulli reported. Many retirees favor flexibility, asset growth opportunity and working with a financial adviser instead of guaranteed income, Cerulli found.

“Retirees are a heterogeneous cohort and transitioning from working and saving to spending in retirement is such a personal matter that no one product or solution will satisfy the needs of all retirees,” explains O’Brien. “Nevertheless, cost-conscious retirement income solutions that distill complicated saving, investment, and spend-down considerations into straightforward, concise participant experiences are most likely to win favor from plan sponsors and consultants.”

Cerulli also finds that several asset managers have come to market with new guaranteed income and non-guaranteed retirement income products for defined contribution plans, since passage of the 2019 Setting Up Every Community For Retirement Enhancement Act. The legislation included lifetime income provisions intended to lift barriers that may have kept employers from offering the products in defined contribution plans.

Cerulli finds the most common approach is target-date series with embedded annuities.

“The importance of a simple, streamlined approach to crafting guaranteed income products for the litigious, fee-sensitive DC market cannot be overstated,” O’Brien adds.

The research was conducted by Cerulli in the third quarter of 2022, according to a spokesperson.