PLANSPONSOR - May - June 2023 - 20

FEATURE
How the Products Work
Some of the guaranteed-income TDFs on the market now include
AB's Lifetime Income Strategy and FlexPATH's Target Income
Portfolios, which use TIAA as recordkeeper.
In April, State Street Global Advisors and Annexus Retirement
Solutions announced that the State Street GTC [Global Trust
Company] Retirement Income Builder series-a target-date-fund
series that includes an embedded retirement income annuity-
will launch in the third quarter.
As Look explains, these funds work the same way a TDF
does: A participant's regular contributions are collected and
allocated according to the underlying metrics for the targetdate
fund design for the person's expected retirement date-a
certain amount to equities, fixed income and perhaps some
other asset classes.
In most of the " TDF plus income " funds now available, says
Holly Verdeyen, U.S. defined contribution leader,
in Mercer's
Chicago office, part of the fixed-income allocation is devoted to a
" guaranteed income " sleeve, and, as the participant's target retirement
age approaches, that allocation increases. Industry participants
refer to the guaranteed income bucket as a separate and
distinct asset class.
Throughout the accumulation phase, while participants are
working, they can see their total fund balance, which may rise and
fall with market swings.
But at some point, typically at retirement, individuals will
elect to receive the income stream. At this point, unbeknown to
them, their fund balance will be sold to an insurer or insurers,
which will now guarantee the income. Rather than being the
holder of a certain amount of assets, the retiree is now the recipient
of a guaranteed income stream for life.
In fact, funds with what is called guaranteed living withdrawal
benefits will calculate participant payout streams based
on the person's account balance or benefit base at retirement,
whichever is larger. The new State Street product " targets a 6%
annual income rate at income activation, calculated using the
highest captured high-water mark of the fund, " according to a
release about the product .
How to Spend the Products Down
Sources generally agree that, while industry initiatives and policy
changes have helped most Americans understand and act on the
need to accumulate savings for retirement, there is less understanding
of how to go about decumulating what has been saved.
" There's been a recognition that where we haven't helped
the average worker is in thinking through, how do I take that
20 PLANSPONSOR.COM May - June 2023
savings and make it last through a lifetime when we all don't
know how long our lifetime will be? " says Jennifer DeLong, a
senior vice president, managing director, who heads defined
contribution for AB in New York City.
" How do you take your defined contribution plan and
provide either additional tools or additional investment solutions
that can help make the drawdown phase easy and almost automatic
in many senses? [The fund] is more than just a savings
vehicle-it's more of a retirement vehicle, " DeLong says.
But Chris Brown, the founder of Sway Research, a specialist
in market analytics on target-date funds,
in Newton, New
Hampshire, says the question of " how to spend it " is the last thing
on many retirees' minds.
In a previous career iteration, when he would run focus
groups for plan participants, Brown says, most people would refer
to their retirement savings as their " G od forbid " money. " There's
a mindset of wanting to take other things first-pensions, Social
Security-and only touch this money as a last resort, or try to
leave it all to the kids. "
How Can Sponsors Meet the Need?
What is even less clear than what participants want is whether a
product such as this is the answer.
Look notes that plan sponsors could simply offer singlepremium
immediate annuities as one retirement option alongside
traditional target-date funds-or even encourage employees to
delay taking Social Security, which, he admits, may be a tall order.
And in the years during which the SECURE Act made the
products possible and fund managers brought them to market,
times have changed, Brown notes. " We were always hearing,
'Where the heck am I going to get income?' There just was no
income to be had. Now you can get 5% from the bank. "
But others think the new products move the needle. " I
do believe that auto-income is going to be the next automated
feature in defined contribution plans, following auto-enrollment
and auto-escalation, " says Verdeyen.
" I think target-date funds with an income component will
eventually replace the ones without it; though, for plans with
certain demographics,
without guaranteed income, " she says.
Considerations for Plan Sponsors
For plan sponsors considering guaranteed-income products, there
are plenty of things to be aware of. On the plus side, if they prove to
be as popular among participants as fund managers predict, they
may turn out to be useful as a recruiting and retention tool.
it may make sense to consider those
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