State Street rolls out second 401(k) target-date series featuring an annuity

The plan feature is provided by Global Trust Co. and Annexus Retirement Solutions.

State Street Global Advisors this week added a second 401(k) option that combines a target-date strategy with an annuity.

The new product, called the State Street GTC Retirement Income Builder series, arrives less than a year and a half after the firm signed its first big customer for its existing target-date-and-annuity combo, IncomeWise.

Both are part of a product proliferation trend enabled by the Secure Act of 2019, which outlined the responsibilities plan fiduciaries have in their selection of annuities providers, resolving some ambiguity that had lingered for years. The second iteration of that legislation — known as Secure 2.0 — signed late last year, includes sections that could help make annuities more attractive in tax-advantaged retirement accounts.

Although annuities have been an option for defined-contribution plans for years, they have seldom been used in 401(k)s but have been more common in nonprofit plans.

So far, State Street has one client for IncomeWise, but it’s a big one: the $32 billion University of California DC plans, which include more than 330,000 participants.

“Additionally, we were recently notified that a large corporate plan intends to replace their existing target-date funds with an IncomeWise solution,” Brendan Curran, head of defined contribution for the Americas at State Street, said in an email.

While IncomeWise is paired with an optional qualified longevity annuity contract that starts income payments at 15 years to 20 years into retirement, Retirement Income Builder uses a lifetime income option from Annexus Retirement Solutions within the target date’s glide path, according to State Street.

“For participants who elect lifetime income, IncomeWise seeks to provide a steady stream of income that starts immediately and lasts a lifetime,” Curran said.

The two options are quite different in design and “appeal to different types of participants,” Spencer Look, associate director of retirement studies with Morningstar Center for Retirement and Public Policy, said in an email.

“The IncomeWise solution uses a longevity annuity, with guaranteed income payments starting 15 or 20 years or so into retirement. The State Street GTC Retirement Income Builder Series uses a group fixed indexed annuity with a guaranteed lifetime withdrawal benefit (GLWB) to provide the income at the start of retirement,” Look said. “The GLWB design is more flexible, as participants can take their account balance in the annuity at any point in the future.”

The income feature of the new product “helps promote growth opportunity and permits liquidity and portability, pre- and post-income activation,” State Street wrote in an announcement of the plan option.

The new product seeks to mitigate sequence of return risk and longevity risk, or the risk of running out of money during retirement, “by capturing quarterly high-water marks on the full account value and providing lifetime income,” the announcement read. “The fund targets a 6% annual income rate at income activation, calculated using the highest captured high-water mark of the fund.”

The insurance companies currently used within the new Lifetime Income Builder option are Nationwide and Athene Annuity and Life Co. However, “there are additional well-known insurers currently in the process of joining the series,” State Street said in its announcement.

Within the product, State Street manages some of the assets and gives glide path recommendations to Global Trust Co., which is the fiduciary and serves as trustee.

OPTIONS ABOUND, BUT ARE THERE MANY TAKERS?

Over the past few years, numerous companies, including BlackRock, Nationwide, Capital Group, Lincoln Financial, Morningstar Investment Management and National Professional Planning Group, have helped bring guaranteed income features to DC plans. A separate group of firms — American Century, Prime Capital Investment Advisors, Nationwide and Lincoln — in 2021 started an option called Income America, which pairs a target-date CIT with a guaranteed income feature.

Those all represent efforts to make DC plans better spend-down vehicles. While 401(k)s and similar types of plans have been very successful in accumulating assets, they were not designed around retirement income.

“Take-up overall has been slow. Many plan sponsors have adopted a wait-and-see type of approach,” Morningstar’s Look said. “It’ll be interesting to see if there is more take-up with more solutions launching and more availability across record-keeping platforms.”