Target-dates with guaranteed income, the new 401(k) pitch

A group of financial services companies announced Wednesday that it's launching one of the first major 401(k) products aimed at in-plan guaranteed income since the SECURE Act went into effect.

The collaboration — between an investment manager, an RIA and two insurance companies — produced a target-date series with a guaranteed lifetime withdrawal benefit.

The industry has been trying to break into this space for years, but success has been elusive. Defined-contribution plan sponsors have long had the option of including income guarantees, through annuities, as part of the default investment in their 401(k)s, although there have been few takers. Nearly a decade ago, United Technologies made waves by setting up an automatic guaranteed-income plan for its workers, but that did not spark others to do the same.

The SECURE Act sought to change that by clarifying responsibilities and protections for plan sponsors that seek to add lifetime income options.

The new product, Income America, is designed to be used as the qualified default investment option — the investment that participants are automatically set up with — within a 401(k) plan. It is a target-date collective investment trust that uses a single glide path designed by American Century Investments and includes underlying investments from that firm and others, such as Vanguard, Fidelity and Prudential.

“It’s appealing because these retirement leaders at times are competitors as well. Here we are, coming together to solve this need in the marketplace,” said Rick Luchinsky, head of retirement at American Century. “No one firm can do it all.”

The vision for the collaboration came from Prime Capital Investment Advisors managing partner Scott Colangelo, Luchinsky noted. That RIA is the consultant responsible for the product's overall design, choosing the partner firms and selecting the investments that are part of the income guarantee.

“They were frustrated with the solutions in the marketplace today,” Luchinsky said. “A lot of them were proprietary-oriented products. They lacked portability.”

The target-date series is built with a mix of active and passively managed investments and is available alone or with the guaranteed lifetime withdrawal benefit, Income America 5forLife. Total costs will be 32 basis points and 130 bps, respectively.  

The guarantee is provided by two insurers — Lincoln Financial Group and Nationwide — each of which will be responsible for half of it. When participants move their assets into the guaranteed product, the service will calculate an income base from which they can receive 5% payments for life. That base is either the initial account value plus all contributions or a higher market value, if the assets have appreciated, according to the announcement. The higher amount is set as a one-time event, according to the companies.

If account owners decide to take a rollover or cash out, they would receive the market value minus any withdrawals they had taken, Luchinsky said. There is a joint option for the guarantee, at a lower payout percentage.

Because the product can be included on any retirement plan record keeper’s system, it is portable, should a sponsor decide to switch providers, Luchinsky said. The investments are also fully liquid, and plan participants can roll their assets over or take a distribution even after starting to take income, he said. There is not a surrender penalty for doing so, he said.

The collaboration is designed to put plan sponsors at ease over their fiduciary responsibilities.

Wilshire Advisors serves as the 3(21) fiduciary, meaning it helps select the glide path manager, the guaranteed income providers and the underlying funds that have been approved by Prime Capital, according to an announcement the groups made Wednesday.

Wilmington Trust serves as the trustee for the CIT and is a full-discretion 3(38) fiduciary.

The companies are currently responding to requests for proposals and information and expect to be available on different record keepers’ systems in April. The companies are planning a “series of income symposiums” that month for retirement plan service providers and sponsors, Luchinsky said.

“The marketplace needs this support to understand how to use these types of solutions,” he said. “How you implement the solution is really important. Offering it as a QDIA in a plan to help participants get allocated appropriately is key to the takeup rate.”