BlackRock to mix target-dates and annuities

BlackRock is taking another stab at the combination of target-date funds and annuities, on Wednesday, announcing a new product in conjunction with Equitable and Brighthouse Financial.

The product, LifePath Paycheck, is fully liquid, according to BlackRock, and it includes fixed annuity contracts from the two insurers.

The investment manager, which bills itself as the original target-date fund provider, initially floated a related target-date and annuity pairing in 2008. That product, LifePath Retirement Income, would have included an allocation to deferred income annuities from MetLife.

The firm has hardly alone in trying to win over 401(k) plans with such target-date funds — a decade ago, several other fund companies either dabbled with annuity-paired products or strongly considered them.

“For quite some time the industry has been talking about the need for guaranteed income in 401(k) plans,” said Anne Ackerley, head of BlackRock’s retirement group. “LifePath Paycheck builds on all that work that’s been done previously. There have been different thoughts over the past few years. We’ve learned a lot of things in terms of how we think is best to structure this.”

In 2013, BlackRock began rolling out a product suite it called CoRI, which included indexes for the cost of lifetime income, and later, a line of funds.

A problem has been that plan sponsors have been hesitant to opt for in-plan annuities, particularly when such products are part of the plan’s qualified default investment option. Sponsors wanted more clarity from regulators that would outline their liability in selecting annuity products and providers.

The IRS and Department of Labor provided guidance, though the recently passed SECURE Act has been considered a landmark in identifying the safe harbor that helps limit plan sponsors’ liability.

BlackRock had the new product in the works before the recent legislation, Ackerley said. The company applied for a trademark on the name in late 2018, according to records posted by Justia.

BlackRock will act as a 3(38) fiduciary in the new service, meaning that it has full discretion to select investments on behalf of plan sponsors.

“SECURE makes people feel more comfortable” with the idea of annuities in their 401(k) plan, Ackerley said.

Over the past several years, other companies have moved forward with retirement income products designed for defined-contribution plans such as 401(k)s. TIAA has annuities as an option for some retirement plan clients, and Empower Retirement launched a service that gradually shifts allocations from target-date funds to managed accounts.

It is unclear what type of investment vehicle the BlackRock product will use for the target-date component, though the firm had not filed a prospectus for a 1940 Act product as of publication.

"BlackRock has announced other target-date strategies that featured annuities over the years, but due to a lack of client pickup these other strategies never actually saw the light of day," said Madeline Hume, manager research analyst at Morningstar, in an email. "Until there’s a publicly disclosed seeded vehicle to examine, a lot is still up in the air."

It will likely be an institutional product, however.

“Initially we’ll be talking to some to the larger employers in the U.S. That’s historically where BlackRock has had its client base,” Ackerley said. “We need scale. And once we have scale, we’d love to make it available to all plan sizes.”

The firm did not comment on the range of fees.

The product will gradually begin allocating assets to group annuity contracts when an investor turns 55, with the allocation to the insurance component eventually reaching about 30%, or about half the level of the fixed income allocation that the existing LifePath series hits at its target date.

But investors are not locked into those contracts and have the option of taking annuity payments, as the assets are liquid, according to BlackRock.

The firm is in talks with several large DC record keepers, though it identified one, Voya Financial, as having an interest.

“This is going to be the next wave of evolution within the target dates,” Ackerley said. “There’s a lot of innovation in this structure, but one of the key innovations is bringing all the different parts of the ecosystem together to make it an all-in-one solution for the participant.”

The firm worked with Microsoft to include the new service on its Azure cloud-based system.

“We wanted to make this easy for record keepers, plan sponsors and participants, so by building a lot of the technology, we’ve made it so that record keepers can put this on their platform,” Ackerley said.