Evaluating a Retirement Income ‘Easy Button’

A report released Tuesday by Morningstar Inc. asks the question: “Can a new wave of target-date strategies be the easy button for retirement income?”

In a review of the market of relatively new TDF products designed with annuity distributions, Morningstar researchers concluded that, while the products have potential to help in retirement saving and decumulation, uptake will require both education and communication among participants.

The investment data and analytics researchers acknowledge the need for saving decumulation management with the number of retirees expected to “skyrocket” in coming years. They noted, as TDFs have become one of the most popular savings accumulation options, the investment industry in recent years has leaned into a “new wave of target-date strategies that try to make that transition easier by including annuities as part of their glide path.”

ince 2020, at least 10 target-date series with some form of annuity have been launched, according to Morningstar estimates, which includes  BlackRock Inc.’s launch of a new series this April with about $27 billion committed from over 14 plan sponsors.

Products, however, are not equivalent to market share, the researchers note. They estimatedtotal assets in TDF vehicles with annuities to be less than $50 billion in a TDF market that stood at $3.5 trillion at the end of 2023.

“Annuities can help with many retirement spending decisions, but they still may not be the right choice for everyone,” wrote the research team led by Jason Kephart, director, multi-asset ratings, global manager research, for Morningstar. “Education remains these products’ biggest hurdle to success.”

In the report, Morningstar explained the potential benefits of annuities to guard against longevity and market risks, with positive aspects both for retirees who spend too much, or those who have the tendency to hoard savings unnecessarily. Even so, the firm noted the psychological roadblocks to many savers in purchasing an annuity.

“Despite annuities’ benefits, not many retirees purchase them,” the researchers wrote. “Past research has pointed to the complexity of annuities, their marketplace, and behavioral barriers to annuities, such as our tendency to loss aversion, regret aversion, and temporal discounting, as reasons for the takeup rate. Some retirees, for example, may see annuities as a gamble, since they can’t know for certain they will live long enough to spend all the money they put in an annuity. Others might be uncomfortable with some annuities’ lack of flexibility.”

Auto Potential

Morningstar wrote that, among providers, AllianceBernstein’s AB Lifetime Income has the most assets at about $10 billion at the end of 2023—more than doubling from $5 billion in 2021 after the passage of the original Setting Every Community Up for Retirement Enhancement Act of 2019, which created a safe harbor for employers offering an annuity within a 401(k), and also allowed for portability between 401(k) and 403(b) plans.

Morningstar predicted that BlackRock’s LifePath Paycheck series would surpass it after launching in April, though noting the full market will still be a “drop in the ocean of target-date assets.”

Morningstar goes on to lay out some of the target-date series with annuities available in the marketplace by type, including:

Different Choices

Morningstar explained the different types of annuities, calling out income annuities, which provide a “guaranteed stream of cash in exchange for a lump-sum payment.” The firm noted that these annuities provide “priceless piece of mind for some,” but also have “downsides,” which include having income locked up that may be invested elsewhere, as well as purchasing power that may be eroded by inflation over time.

Another option is a savings annuity with a guaranteed lifetime withdrawal benefit, which doesn’t require investors to surrender control of their investments and may provide for more upside than income annuities. The GLWB option allows investors to withdraw a certain percentage of savings each year.

Morningstar also described the challenge for plan fiduciaries  to benchmark and address fee structures depending on the product. Income annuities, the researchers wrote, don’t have “an explicit fee” attached to them, making them harder to compare across products. Meanwhile, savings annuities are easier to compare costs as they have both explicit and implicit fees, but due to that they usually will appear “more expensive in almost all cases.”

The researchers ended on a positive note regarding the development of TDFs with a guaranteed income option.

“Our research shows that the industry is stumbling to catch up to this problem [or retirement decumulation]; though, its most recent efforts—target dates with annuities—show promise,” Morningstar concluded on a positive note concerning the products. “They automate investors’ asset allocations and payments in retirement. They also simplify the annuity buying process by providing only vetted annuity products to investors as well as avoiding advisor commission fees.”