Increase in Target-Date Funds with Annuities Signals Industry Shift
The presence of annuities within target-date funds remains relatively minor, yet a recent Morningstar report indicates that retirement plans are increasingly integrating these options. By the end of March, assets in target-date funds with annuities reached $42 billion across 13 series, marking a nearly 70% increase from the previous year. Non-ERISA plans, like 403(b)s, have long experimented with in-plan annuities. TIAA’s RetirePlus serves as an example, managing approximately $75 billion in 403(b) plans by March 2026, resembling a target-date series with an annuity element.
Including these emerging products, assets in multi-asset portfolios featuring embedded annuities have risen to over $117 billion, up from $45 billion two years ago. The report suggests that as ERISA regulatory guidelines become clearer, interest in target-date funds with annuities might grow. The Department of Labor's proposed guidance now includes lifetime income options for defined contribution (DC) plans, potentially boosting interest.
Vanguard has introduced its first target-date series in over 20 years, featuring an annuity option, highlighting growing confidence in this category. Morningstar analysts noted, “For plan sponsors, navigating fiduciary liability is a constraint, and clarity on safe harbors may encourage looking beyond traditional target dates. The promise of guaranteed retirement income is an easy sell to participants.”
Plans with in-plan annuities differ significantly from retail versions. While retail offerings often involve commission-based fees, annuities within DC plans typically benefit from lower costs associated with group institutional pricing. This distinction allows for greater affordability and transparency for participants.
Brendan McCarthy of Nuveen emphasized that the shift to annuity target dates is accelerating as 401(k) plans aim to provide employees with a straightforward way to convert retirement savings into guaranteed income. Over the next decade, it is expected that more than half of all target-date assets will include annuities, reflecting a significant trend in retirement planning.
Morningstar's report analyzes the variations among these offerings, particularly in structure, cost, and flexibility affecting retirement outcomes. Researchers observed variability across over a dozen target-date series offering guaranteed income, noting the challenge of assessing their suitability for 401(k) plans. The Department of Labor's six-factor framework aids plan sponsors, yet a thorough assessment of fees, guarantees, insurer strength, and participant understanding remains essential.
The potential benefits of annuities in the right circumstances are emphasized, recognizing diverse participant needs and preferences, such as income sources, health, and risk tolerance. The overall appeal lies in providing more reliable lifetime income, reducing sequence risk, and making guaranteed income more accessible than traditional retail annuities.