Products August 8, 2023

TIAA’s Nuveen Launches TDF With Embedded Guaranteed Income Annuity

The new series aims to bring 'pension-like' income options to participants, according to Nuveen's retirement investing head.

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Nuveen, the investment manager of TIAA, launched on Tuesday a target-date solution for defined contribution retirement plans with a deferred fixed annuity option designed to provide steady income throughout retirement.

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The Nuveen Lifecycle Income Series is structured as collective investment trusts only available to qualified retirement plans, Nuveen announced. The series include the TIAA Secure Income Account, a deferred fixed annuity, with participant contributions toward the investment increasing as they near retirement.

“Consultants can now go to their plan sponsors and educate them that they can provide their employees with the option of pension-like guaranteed income,” says Brendan McCarthy, head of retirement investing for Nuveen. “In fact, they can do it through a familiar QDIA [qualified default investment alternative] vehicle such as a target-date fund.”

TIAA and Nuveen come to market with the offering as surveying continues to show desire for guaranteed retirement income beyond Social Security in the 401(k) marketplace, along with challenges in implementation. Uptake by plan sponsors remains limited due to a variety of factors, ranging from fiduciary concerns to lack of availability from recordkeepers, even as retirement industry lobby groups push for continued legislative support for annuities being a default option in plans.

TIAA recently announced that its RetirePlus, which offers guaranteed income as a custom default on its own recordkeeping platform, has hit 250,000 participants and more than $22 billion in assets under administration. Those outcomes have partly driven the request from retirement plan advisers for a 401(k) TDF option with an embedded annuity, McCarthy says.

Another key driver for development of the Lifecycle series, he says, is “the retirement crisis in the U.S.” and lack of guaranteed income for workers even as people are living longer.

“There’s that need for guaranteed income in the 401(k) markets,” McCarthy says. “Being able to deliver it in a simple and familiar way—in particular through a target-date series—that’s the solution that we feel is needed.”

Fees for the target date funds are: two basis points for the Nuveen Lifecycle Income Index Series, 16 basis points for the Nuveen Lifecycle Income Blend Series and 27 basis points for the Nuveen Lifecycle Income Active Series, according to the company.

Potential Payout

A participant invested in the series has the option, but is not required, to turn some or all of their savings in the TDF into a monthly contribution, according to Nuveen’s announcement.

If a participant changes jobs, the solution is portable if their new recordkeeper makes it available, McCarthy says. Otherwise, they can liquidate it without penalty and, if they want, move it into an IRA.

The new series is an “extension” of the Nuveen Lifecycle target-date fund platform and will include three TDF strategies for investing: Nuveen Lifecycle Income Index (passive investments); Nuveen Lifecycle Income Blend (a blend of active and passive investments); and Nuveen Lifecycle Income Active (active investments).

The trustee for the new CITs is SEI Trust Co., the provider and fiduciary for investments made in the CIT, with Nuveen serving as adviser, according to the announcement.

The Path Ahead

The Nuveen Lifecycle Income series starts allocating a new participant’s savings at 2.5% and then increases the percentage—by replacing fixed-income investments—as they get closer to retirement, according to McCarthy.

“As you go through the glidepath and your assets shift from more aggressive equity allocations to more conservative fixed-income allocations, you are shifting a greater proportion into this underlying secure income account,” he says.

TIAA’s SIA investment also includes a “loyalty bonus” profit-sharing program. That setup makes it worthwhile for retirement savers to start in the TDF early, as opposed to being transferred into it when closer to retirement, according to McCarthy.

The Setting Every Community Up for Retirement Act of 2019 allowed for corporate retirement plans to include guaranteed life income annuities, a practice common in the nonprofit 403(b) market, of which TIAA is the largest plan provider by assets under administration, according to PLANSPONSOR’s latest recordkeeping survey.

McCarthy says adding an in-plan annuity has been an ongoing challenge for recordkeepers due to the required technology build, as well as the wide number of options coming to market.

That said, he notes that “we are starting to see the first recordkeepers start to incorporate third-party solutions.” He also notes that there have been several middleware providers connecting in-plan annuity providers and recordkeepers to get them onto their platforms.

At this point, he says, retirement plan consultants are “instrumental” in getting retirement income products in front of plan sponsors.

“They can help the redesign of the 401(k) plan so it’s not just a tax-preferential savings plan, but a comprehensive plan that provides the employees and participants with that option of guaranteed income that they can’t outlive in retirement,” McCarthy says.

Compliance August 7, 2023

Pension Risk Transfers in No Need of Overhaul, Insurance Executives Say

Minor changes, such as requiring pensions to consider cybersecurity before selecting an annuity provider, could be positive, however.

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Representatives of the life insurance and pension risk transfer industry say that only minimal changes, if that, are needed to the Department of Labor’s Interpretive Bulletin 95-1 that governs fiduciary standards for selecting an insurer for a pension annuitization.

The SECURE 2.0 Act of 2022 requires the Department of Labor to study IB 95-1 and report its findings and any recommended changes to Congress by the end of this year.

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The DOL’s ERISA Advisory Council hosted a stakeholder hearing in July to discuss possible changes to IB 95-1. In a written submission to the council, Agilis, an insurance consultancy in the pension risk transfer market, explained that IB 95-1 is working well, but some positive changes could still be made.

The firm stated that an updated IB 95-1 should require fiduciaries to consider both the use of reinsurance and the cybersecurity administration of the provider. Michael Clark, a managing director and consulting actuary with Agilis says cybersecurity “should be explicitly mentioned in the standard.”

Fiduciaries should also be made aware that they can use more than one independent expert when determining the safest annuity provider available, according to Agilis, and the DOL should make IB 95-1 a formal regulation, rather than an interpretive statement, so it has clearer legal force. Clark said the “DOL should issue formal regulations that codify IB 95-1.”

The Agilis statement also noted that some of the more common concerns about the PRT marketplace, as expressed at the hearing by advocates for labor and the elderly, are already addressed by IB 95-1. For example, the role of private equity investors as owners of insurance companies and that structure’s potential to create conflicts is addressed by the requirement to consider the insurer’s other liabilities or “lines of business.” Another concern, that insurers are adopting riskier investment portfolios, is also addressed already: “The quality and diversification of the annuity provider’s investment portfolio” is listed in IB 95-1, Clark said.

A written statement by retirement services and annuity provider Athene to the ERISA Advisory Council explained that part of the reason for moving to less liquid or riskier investments is because corporate bonds are more correlated and therefore less diversified than they have been in years past. This creates a need to diversify out of lower risk bonds.

Athene stated that “there is simply no compelling need to overhaul IB 95-1” because the legitimate concerns about PRTs are already addressed by IB 95-1, and no PRT payment has been missed because of a solvency issue since IB 95-1 was issued, a remark repeated by other representatives of the industry at the hearing.

Many labor advocates argued at July’s hearing that annuitizing pension obligations removes Employee Retirement Income Security Act and Pension Benefit Guaranty Corporation protections from plan participants because life insurance companies are not backed by the PBGC or directly subject to ERISA.

Clark says it is “arguable that you are losing ERISA protections” because the provisions of the plan are transferred to the insurer and priced. The PRT product will normally mirror the benefits of the plan, and since that plan was designed under and subject to ERISA, the annuity is functionally the same.

Clark adds that the PBGC backup is not as great as some make it out to be. Pensions fail more frequently than insurance companies, and the PBGC typically requires participants to take a “haircut”—sometimes a heavy one.

The PBGC does provide a guaranteed level of protection, and as an institution, is less likely to become insolvent than a life insurance company because it is backed by the federal government. This means that though participants may have to take a haircut when the PBGC takes over their pension, they are not facing the same risk they would be if their annuity manager becomes insolvent.

Clark concedes this point and says, “Both systems provide protection” but adds that it is “hard to see a scenario where people lose as much as they might if the PBGC takes over their benefits” and that when it comes to a catastrophic failure of an annuity provider such that participants take a heavier hit than they would under the PBGC, “the likelihood of that isn’t zero, but it is pretty darn close to it.”

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