Vanguard Launches Target-Date Fund with Embedded Annuity to Enhance Retirement Income

Vanguard has introduced the Target Retirement Lifetime Income series, a new target-date fund option that incorporates an annuity feature intended to facilitate retirement income generation.

This represents Vanguard's first new target-date offering since 2003, and the firm remains a dominant player, with its Target Retirement Funds controlling over $4 trillion in assets. The Lifetime Income series follows Vanguard's traditional glide path until age 55, then begins allocating funds to the TIAA Secure Income Account, a savings annuity that grows over time and can later be converted into a lifetime income stream.

By age 65, 25% of the portfolio is typically allocated to the annuity portion, which investors may then elect to convert into guaranteed income payments. This series is available exclusively through defined-contribution plans like 401(k)s. Costs are expected to remain competitive, with mutual fund fees starting at 0.08% and potentially lower for collective investment trusts depending on plan size. Traditional target-date funds mainly focus on wealth accumulation and risk reduction approaching retirement but do not inherently deliver steady income streams. In contrast, funds with embedded annuities aim to simplify retirement income management and help mitigate sequence-of-returns risk during early retirement. Vanguard is not alone in this approach; BlackRock’s LifePath Paycheck, launched in 2024, has seen assets grow substantially, highlighting growing interest in annuity-enhanced target-date funds. However, despite asset growth to approximately $29 billion among such funds, the segment remains a small fraction of the overall target-date fund market. Education and investor engagement challenges pose significant barriers to wider adoption since annuities add complexity and require participant understanding of activation timing and integration with overall retirement plans.

The ease of use and automatic enrollment that have driven target-date fund popularity contrast with the additional decision-making required when annuities are involved. Many older workers do not invest their entire portfolios in a single target-date fund, limiting the potential benefits of embedded annuities. For example, individuals allocating a portion of their savings outside the target-date fund could receive significantly less guaranteed income than those invested fully in the annuity-including fund. Deciding annuitization amounts depends on individual financial circumstances, other income sources, risk tolerance, and spending plans, adding further complexity.

Vanguard's offering seeks to address annuity complexity and transparency challenges to improve predictable retirement income accessibility. Nonetheless, adoption is expected to be gradual due to educational needs and participant engagement hurdles, and the actual impact on retirement outcomes is yet to be determined.