Despite a tepid response from plan sponsors, asset management firms continue to develop and promote annuity-enhanced target date funds, insisting that demand for retirement income will spur interest.
BlackRock Inc. and Prudential Financial Inc. already have such products, and AllianceBernstein LP and UBS AG are among the companies developing them. Goldman Sachs Asset Management has said it would eventually attach an insurance element to the custom target date funds it expects to develop. This summer, Putnam Investments is expected to announce a lifetime- income solution it has been developing, which may or may not involve annuities.
But plan sponsors and advisers remain unconvinced.
“I think the concept is great, but I'm looking at it with very guarded anticipation,” said Gerald Wernette, director of retirement plan services and a principal at Rehmann Financial.
Advisers who work with retirement plans point out that while the idea of being able to provide guaranteed income is intriguing, issues of cost, simplicity and whether the annuities can provide sufficient income are a concern.
“Saying you have this guaranteed income for life isn't enough; you have to know if it can support your lifestyle,” said R. Allen Vaughan, president of 401-k.pro Fiduciary Managers Inc.
Portability and carrier risk are also worries.
“I like the thought of having built-in protection and a floor with a target date fund, but what happens if the plan sponsor decides to move away from a provider?” Mr. Wernette asked. He also questioned whether carriers would be able to back the guarantees in the event of a market downturn.
Excessive equity risk is another worry, since the annuity component's hedge against longevity risk might tempt fund managers to seek greater returns in the market. For example, BlackRock's SponsorMatch, a fixed-annuity enhanced target date fund, has an equity exposure of 47% at its landing point, compared with a 38% exposure for its LifePath target date fund, which doesn't include an annuity.
A 50% to 60% allocation in equities at retirement is the “sweet spot” for AllianceBernstein's product, said Thomas J. Fontaine, head of global defined contribution at the firm.
But experts worry that the presence of the annuity could lead to excessive risk taking without regard to the target date.
“You don't want to see the allocation blown far out of proportion so that we overload into equities just to boost returns,” said Scott Demonte, director of variable annuity markets at Financial Research Corp.
Because of policy concerns over the ability of 401(k) plans to fund income through retirement, the idea of combining annuities and mutual funds in some way appeals to policymakers and product companies.
The Labor and Treasury departments received some 700 replies to their joint request for information on including lifetime-income options in retirement plans, and the topic was the focus of a hearing held last month by the Senate Special Committee on Aging.
Asset management firms and insurers see those developments — along with concern about the riskiness of target date funds — as signs that annuity-fund combinations are viable. The track record of hybrid products, however, hasn't been encouraging.
BlackRock's SponsorMatch, for example, launched in conjunction with MetLife Inc. in 2007, has yet to attract customers, though the firm has been in talks with “several” plan sponsors, said Chip Castille, BlackRock's head of defined contribution for the United States and Canada.
This year, UBS pulled the plug on a target date fund with an annuity component provided by Genworth Financial Inc. The product is back in development at UBS and the firm expects to work with multiple insurers, spokesman Kris Kagel said.
Despite the track record, fund executives think that the timing is right for the product to gain traction among advisers and plans.
“One thing that's changed as a result of the crisis is that participants have an increased preference for lifetime income in the plan,” Mr. Castille said. “The fact that you have annuities in there makes it more directed toward what plan sponsors are trying to provide participants — a secure retirement.”
Mr. Wernette believes in the concept, too. “If the insurance industry can figure it out, a lot of people will make a lot of money,” he said.
E-mail Darla Mercado at [email protected].
