Interest in in-plan annuities in retirement plans has been rising, particularly with the passage of SECURE 2.0 and the persistent rising interest rates. Now, there is a new tool that emerges as part of the traditional target date funds, which more than half of all 401(k) participants use to build their retirement savings, with the annuity: Hybrid annuity TDFs combine the asset accumulation of a target date fund with an annuity that provides guaranteed lifetime income, according to Vanguard research.
Nuveen and its parent company TIAA, as well as BlackRock and State Street Global Advisors, are some of the asset companies that offer these hybrid TDFs.
“Our research finds that this innovative strategy shows investment merit for certain investors,” said Roger Aliaga-Díaz, Ph.D., Vanguard’s global head of portfolio construction and chief economist, Americas. “But there are many potential challenges around suitability, complexity, and costs that need to be addressed in order to unlock its benefits.”
“Using VLCM, we can measure the degree of improvement in an investor’s ability to afford expected living standards throughout retirement, the reduction in the risk of outliving one’s wealth, and mitigation of market risk when using a hybrid annuity TDF versus a traditional TDF,” added Aliaga-Díaz.
There are three types of fixed-rate annuities commonly used in hybrid annuity TDFs, differing by when the retiree would begin receiving income, according to Vanguard research:
- Single premium immediate annuity (SPIA): Starts providing income immediately after the annuity purchase.
- Deferred income annuity (DIA): Starts providing income at a future date after the annuity purchase.
- Qualified longevity annuity contract (QLAC): Starts providing income at a later stage of retirement (age 78-plus). This deferred annuity is exempt from required minimum distributions.
“While hybrid annuity TDFs show promise in providing a more secure retirement, they also introduce complexities and higher costs,” said Aliaga-Díaz. “Addressing these challenges through strategic planning and tailored solutions could make hybrid annuity TDFs a viable option for a broader range of investors, ultimately leading to more personalized and effective retirement outcomes.”
Plan sponsors and participants, according to the Vanguard report, would need additional support and education for adoption of the hybrid TDF.
