Products December 15, 2020

‘Annexus Retirement Solutions’ Launch Signals Rise of DC Plan Lifetime Income

The firm says the formal launch of Annexus Retirement Solutions precedes the rollout of innovative in-plan retirement income solutions in 2021.

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Annexus has announced the launch of a venture called “Annexus Retirement Solutions,” a new division that will focus on “re-engineering” the target-date fund (TDF) structure to better enable lifetime income as part of defined contribution (DC) plans.

In conversation with PLANADVISER, Dave Paulsen, former president of individual solutions and chief distribution officer of Transamerica, and Charles Millard, former director of the U.S. Pension Benefit Guaranty Corporation (PBGC), said they are pleased to have been brought onto this project as advisers. Paulsen confirmed that the new venture intends to debut its first retirement solution in early 2021, to be followed up by multiple other solutions later in the year.

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The pair said Annexus Retirement Solutions is developing “a completely new and innovative offering” that makes it easy for a participant to prepare for a secure financial future.

“Our approach overcomes the barriers that have limited the appeal of lifetime income solutions within retirement plans, including prohibitive costs, lack of true liquidity over the lifetime of the product and the absence of portability if a participant separates service,” Paulsen noted.

Millard emphasized that the announcement “is just the first step we are going to take.”

“We’re going to have multiple innovative income products coming out, and we will have name brand partners joining us,” he said. “Importantly, our solutions are being designed to maximize the income that is ultimately delivered to the participant. We believe we will be competitive in both the qualitative service aspects and the quantitative performance aspects.”

Paulsen said the retirement planning industry as a whole, building on the Setting Every Community Up for Retirement Enhancement (SECURE) Act, is closer than ever to successfully delivering in-plan income. Paulsen and Millard said they are among the supporters of the Securing a Strong Retirement Act, which is already being referred to as the “SECURE Act 2.0” after being proposed and discussed recently in Congress.

“Solving in-plan income is all about creating a default-eligible solution, as we are doing, and, second, it’s about harnessing the power of inertia and not requiring the participant to make decisions that they are ill-equipped to make in terms of the amount of income protection they should purchase,” Paulsen said. “After a lot of work throughout the industry, I believe we are on the cusp of this type of solution being widely utilized.”

Though Annexus Retirement Solutions is an early mover in this space, it should be noted that other firms are pursuing similar strategies, including TIAA, though that firm is focused on the 403(b) marketplace. In a recent conversation with PLANADVISER, TIAA Senior Managing Director Tim Walsh noted his firm’s RetirePlus solution just secured its 100th client.

RetirePlus is comprised of a set of predefined asset allocation models used by plan sponsors to create risk-appropriate defaults using the investment options on the plan’s core menu. The TIAA RetirePlus models include three risk categories, 10 possible models per risk category, and a mix of mutual funds, annuities and other investment options from eight preselected asset allocation categories.

What this ultimately looks like for a given participant is that their portfolio will automatically replace portions of the traditional bond allocation with fully liquid fixed annuities as the glide path unfolds and retirement approaches. Another important feature is that an investor can choose to exit and liquidate the portfolio before, at or after their retirement date, without facing any negative consequences from “exiting” the annuity portion of the portfolio.

“The way I like to explain this is that it has many of the bells and whistles of a managed account, but it is being delivered at no additional costs to the plan or participants,” Walsh said. “RetirePlus Pro, a version of the solution, allows plan sponsors to work with advice from a 3(21) fiduciary adviser or delegate asset allocation to a 3(38) investment manager to customize all aspects of model attributes.”

From a fiduciary perspective, the TIAA RetirePlus Series satisfies Department of Labor (DOL) guidance on pursuing custom solutions supported by the SECURE Act.

“This structure, flexibility and pricing make it appropriate for a variety of client institutions,” Walsh suggested.

The Markets December 14, 2020

Managers Expect Annuity Allocations to be Incorporated Into TDFs

In addition, Cerulli says it expects that plan sponsors and retirement plan providers will engage in more exploratory discussions about including private equity in target-date funds.

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The strategic incorporation of lifetime income products and alternative investments in target-date funds (TDFs) could potentially help providers deliver superior long-term outcomes for plan participants and differentiate themselves in a market dominated by a handful of low-cost providers, according to the December issue of “Cerulli Edge—U.S. Asset and Wealth Management Edition.”

Momentum for including income products in TDFs has been building since 2014, when the IRS issued guidance providing that plan sponsors can include deferred income annuities in TDFs used as qualified default investment alternatives (QDIAs) in a manner that complies with plan qualification rules. A significant barrier to plan sponsor adoption of guaranteed income features was addressed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which—along with a provision addressing the portability problem with annuity products—offered a fiduciary safe harbor for the selection of guaranteed income providers.

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According to Cerulli’s report, the majority (92%) of TDF managers said they expect managed payout options and annuity allocations will be incorporated into future TDF series. The market volatility of the first quarter of this year may also serve as a catalyst for guaranteed income adoption by defined contribution (DC) plans, as nearly two-thirds (63%) of TDF managers suggest this period of heightened market volatility will increase client demand for guaranteed investments.

Cerulli notes that market downturns can help illustrate annuities’ downside protection benefits.

Private Equity

Cerulli says it expects that in the coming months, plan sponsors and retirement plan providers will engage in more detailed exploratory discussions regarding the inclusion of private equity in multi-asset-class products such as TDFs. The Department of Labor (DOL) released an information letter earlier this year offering regulatory guidance related to the use of private equity funds within professionally managed strategies (e.g., TDFs, target-risk funds) that may serve as a DC plan’s QDIA.

Cerulli says it is perhaps most critical for providers to clearly demonstrate to plan fiduciaries how allocating to a certain private equity strategy within a professionally managed product can improve long-term outcomes for plan participants on a risk-adjusted, net-of-fees basis. However, private equity investments come with challenges that plan sponsors need to be made aware of.

“Private equity funds are typically characterized by infrequent pricing events, low liquidity, relatively high management fees and complex investment structures. Conversely, the DC market—litigious in nature—is notoriously fee-sensitive, and the product landscape is dominated by simple, transparent, low-cost investment vehicles,” says Cerulli Senior Analyst Shawn O’Brien. “It may take time for many plan fiduciaries to gain a sense of comfort with private equity investments, and, therefore, thorough educational and informational engagements may be a necessary precursor to adoption in a DC market where private market investments are rare.”

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