Annuities winning a place in target date strategies

Embedding annuities into target date funds might be the key to offering annuities as an investment option in 401(k) plans. Despite mounting interest in retirement income products, 401(k) plan executives have been slow to offer annuities as a stand-alone option, because of their complexity and price. MetLife Inc. of New York became the first to have its annuity product included in target date funds when executives inked a deal with Barclays Global Investors of San Francisco. In March, BGI selected MetLife to provide the annuity portion of its SponsorMatch program. SponsorMatch combines a target date fund with institutional investment strategies managed by BGI and a deferred-fixed-income-annuity element provided by MetLife. SponsorMatch seeks to control exposure to market risk over time by increasing the funding to the annuity payout as the participant ages. Jody Strakosch, national director of institutional income annuities for MetLife, said the deal with BGI was a big first step; now, MetLife executives are talking to other money managers about introducing something similar. She declined to name the managers. Income products are "a very hot topic. It's the record keepers, the money managers; anyone involved is trying to crack the code. One way is to include guaranteed income into a target date fund," she said.
Trisha Brambley, president of Resources for Retirement of Newtown, Pa., said combining annuity options with target date funds is the logical next step. "To really tap into the market, providers must come up with innovative ways. [Providers] have seen the success of target date funds, and getting their product in there would be significant," she said.

HIGH FEES

High fees are the main reason behind plan sponsor reluctance to offer annuities as an investment option. "We've all been living in the world where fees are under increased scrutiny. Just because it's an annuity, it's not going to get a pass," Ms. Brambley said. Other annuity providers, including Genworth Financial Inc. of Richmond, Va., and The Hartford (Conn.) Financial Services Group Inc. are trying to figure out how to get in on the action. Fred Conley, president of the institutional group at Genworth, said executives there are researching how to place its annuity investment option within a target date fund. "We're still early in the guaranteed-income phase. There will be a target date component. We in our research and product group are looking at how this could work with a target date fund. There is an approach where it could be built into the glide path of the target date funds," Mr. Conley said. With ClearCourse — Genworth's annuity — each participant contribution buys a piece of an annuity that when they reach 65 provides guaranteed income for 20 years or life, whichever is longer. "A lot of target date funds manage volatility in retirement by becoming more conservative. One of the advantages [of that is], you can maintain a target date structure and get protection from the annuity component," Mr. Conley said. Genworth — like MetLife is doing with BGI — would work with the target date fund provider to build income protection into the glide path of a target date fund. At a certain age, a participant would have part of his or her assets placed in the annuity option. Patricia Harris, assistant vice president at Hartford Financial, said: "We've done our research on how [annuities in target date funds] would work, and we will start discussions with providers shortly." She declined to name any firms. Hartford offers a fixed-annuity option to 401(k) plans. "It does make a lot of sense to offer guaranteed income as a component of a target date fund. There would be a fixed amount of income, and it would give participants the ability to guarantee a certain amount of money at retirement. It is a very viable route to go, and target date funds are already accepted with plans," Ms. Harris said. These options are likely going to be offered through investment-only shops because they are easier to integrate, she said. The process becomes more tedious when retail mutual funds, which many bundled providers still offer to 401(k) plans, are involved. According to an executive at The Vanguard Group Inc. of Malvern, Pa., who asked not to be identified, the firm was approached by an annuity provider three months ago to offer an "annuity-embedded target date fund." "We found that to go forward would be very complex. It didn't mesh well with our strategy, our glide path. I can see how it made a lot of sense for BGI, but not for us," the Vanguard source said. The source said investment-only providers would have an easier time adding an annuity component to their target date funds because they wouldn't have to be concerned about aligning their record-keeping service with annuity products, which can be tedious. Plus, firms such as BGI have more investment flexibility when creating target date funds, the source said. "Many bundled providers still offer retail mutual-fund-based [target date] funds," the source said.

QDIA POSSIBILITIES

Annuity providers also are looking into offering their programs as a qualified default investment alternative. This would be separate from target date funds and would fall under the "balanced" QDIA that the Department of Labor approved in October 2007. Genworth officials are in talks with 401(k) plan executives to choose the firm's annuity program as the QDIA. "It's a dialogue that's already in the marketplace. A lot of the discussions began [with annuities] as a voluntary option, and now we are in more discussions with plans that froze their DB plan and want to bulk up their 401(k). They are interested in having our product as the default in the sense that they are replacing a DB plan," Mr. Conley said. While annuity products are on the radar for many plans, the implementation has been slow. As MetLife's Ms. Strakosch explained, plan executives and others in the retirement industry first had to accept the "major shift in the whole conversation from accumulating [assets] to guaranteed income. It's been slow going, but we're nearing the tipping point." "The market evolves in layers," Mr. Conley said, acknowledging that the move toward annuities has been slow. Jenna Gottlieb is a reporter at sister publication Pensions & Investments.