Advanced Offerings

Plan sponsors now have a range of lifetime income options to offer participants, with variations in each product or investment type. This should be especially of interest to sponsors as they increasingly wish to retain retired participants’ assets in the plan. As plan advisers discuss these options with  clients, they need to break down the choices into various categories and product types, examples of which are described below.  

Managed Payout Funds, Noninsured 

The Dimensional Target Date Retirement Income Funds from Dimensional Fund Advisors in Austin, Texas, consider retirement in their glidepath design. Funds for younger participants have a higher equity exposure than do other TDFs in their vintage. When a participant is 25 years out from retirement, bond holdings increase, and liability-driven investments are added several years later. 

By retirement, the portfolio mix will have changed significantly. The 2020 fund, for instance, has a 25% equity exposure, with the remaining 75% in what Dimensional calls “income risk management” holdings. For the 2020 vintage, the risk management holdings include 61% in DFA’s Inflation-Protected Securities I fund and 14% in the DFA LTIP [Long-Term Inflation-Protected] Institutional fund. Per the fund’s materials, the allocation shift is “designed to help manage the effects of risks—like inflation or a market decline—on income uncertainty as you approach retirement.”  

The Legal & General Retirement Income 2040 Fund from LGIM America, designed for those who retired in 2020, also uses a portfolio-based approach but with a twist. LGIM America views the first 20 years as the early and active stage of retirement, a period of time when participants need their money the most. Based on that thinking, the fund’s 2040 date is a terminal date at which time the fund will close. Should the participant elect not to spend down his selected balance when the 2040 vintage rolls off, remaining monies would be allocated to the plan’s cash flow matched bond fund.  

Insurance, Annuity-Based 

More product vendors are offering annuities as in-plan retirement income options. The guaranteed living withdrawal benefit, or GLWB, approach is attracting the most discussion, says Spencer Look, Morningstar’s associate director of retirement studies, in Chicago. 

Accounts with GLWBs, also referred to as guaranteed minimum withdrawal benefits, or GMWBs, are similar to traditional investment accounts in that account balances vary with portfolio returns during accumulation. However, the GLWB allows retired participants to withdraw the guaranteed benefit for life, even if their account balance drops to zero—the withdrawal amount is based on the account value or benefit base at retirement, whichever is greater.  

For example, assume a participant about to retire had invested $100,000 in the GLWB portion—the benefit or income base—of his TDF, but a market decline had reduced his account value to $80,000. If the withdrawal rate for his age is 5%, the withdrawal benefit will be $5,000—i.e., $100,00 x 0.05—applying the benefit base, instead of $4,000 applying the market value, or $80,000 x 0.05. If participants withdraw more than the initial amount, subsequent guaranteed payouts will be lower.

GLWBs incur an additional cost to insure the guaranteed benefit. According to research from the Institutional Retirement Income Council, the average cost to have the guaranteed withdrawal benefit is 80 basis points, with a range from 50 to 100 basis points. 

The AllianceBernstein Lifetime Income Strategy product is an example of a target-date fund with an optional embedded GLWB backed by multiple insurers. Participants may choose a secure income level ranging from 0% to 100%. That percentage determines how much of their account balance will be gradually allocated to their plan’s secure income portfolio, beginning around age 50; participants may change their allocation.  

In 2022, Nationwide initiated a new GLWB category with its NCIT American Funds Lifetime Income Builder Target Date Series, according to Cathy Marasco, associate vice president of product development for Nationwide Retirement Solutions in Columbus, Ohio. The series uses a group fixed-indexed annuity that is embedded in certain target-date funds in the series, like any other investment holding of the TDF, she explains. This allows the investment fiduciary to allocate to the annuity on the participant’s behalf.  

Once the fund reaches the target date, the investment automatically generates 6% of the income base as total income annually, though participants may defer distributions to a later date or reallocate to another in-plan investment option. If the equity portion of the underlying TDF goes to zero, the annual income benefit will adjust from 6% to 4.5% of the income base and is guaranteed by Nationwide for the rest of the participant’s life. 

Other Products 

FlexPATH Strategies offers its Target Income Portfolios through plans that use TIAA as recordkeeper. The portfolios are available in three profiles: conservative, moderate and aggressive, with portfolio equity levels at retirement increasing in that order. FlexPATH replaces allocations that would have gone to bond funds with investments in the liquid version of the TIAA Traditional fixed annuity. The participant has the option to convert her TIAA Traditional balance to a lifetime income stream. 

The TIAA Traditional annuity has several features that benefit participants, says Brian Roberts, senior vice president with flexPATH. Long-term investors can accumulate excess reserve credits that can increase annuity payout rates by as much as 20%, for instance. “TIAA Traditional’s long-term returns have been comparable to an aggregate bond index,” Roberts says. “It underperforms during periods of falling interest rates and outperforms during periods of rising interest rates. It also provides an added level of security as participants approach retirement because it doesn’t decline in value when interest rates go up.”