First client for State Street's target-date and annuity feature is a $35B plan group

State Street Global Advisors has secured a major client for its service that incorporates an annuity into a target-date series.

On Monday, the company announced that the University of California defined-contribution plan system, with nearly $35 billion in assets, has started using the IncomeWise product, which includes a qualified longevity annuity contract provided by MetLife. The school incorporated the product as part of its Pathway target-date series in August, according to the announcement.

The product is far from being the first of its kind in the DC market — but the plans using it are potentially the largest to opt for a target-date series paired with an insurance feature.

The first DC plan to use that kind of arrangement was United Technologies Corp., now part of Raytheon, which made a target-date and annuity combination the default investment for its participants nearly a decade ago. For a long time, it was the only prominent plan to do so.

The SECURE Act has changed that by providing new protections for plan fiduciaries that opt for insurance products, and several financial services firms have since brought products to the market. Earlier this month, for example, Fidelity Investments began making annuities available in-plan to clients through a service it called Guaranteed Income Direct.

In October, BlackRock disclosed that five large retirement plans had signed on for its LifePath Paycheck service, the availability of which the company had announced more than a year earlier.

Two other companies — Nationwide Insurance and Capital Group — also announced last month that they were launching a target-date collective investment trust series paired with a fixed-indexed annuity with a guaranteed lifetime withdrawal benefit.

Also in October, Lincoln Financial, Morningstar Investment Management and National Professional Planning Group unveiled a pooled employer plan with a guaranteed income component.

And earlier this year a group of firms — American Century, Prime Capital Investment Advisors, Nationwide and Lincoln — launched Income America, a plan option that includes a target-date CIT and a guaranteed income feature.

HOW IT WORKS

The University of California is State Street’s first client for IncomeWise, and the company worked with the plan’s record keeper, Fidelity, to implement it, according to State Street. The product is a custom target-date fund, and State Street is in the process of developing a CIT version. The company said it's in talks with existing clients about the option. Just over a year ago, State Street executives pitched IncomeWise to the State of Michigan, state records show.

Information from the company’s site shows that participants can opt for the annuity feature at age 65, and at that time a fraction of their account balance will be used to purchase the QLAC. Payments from the annuity would begin at age 80.

Participants in plans that include the feature can opt for an annuity purchase worth as much as 25% of their account balance or $135,000, whichever is lower, due to QLAC regulations, according to State Street.

“The annuity helps address the risk of ‘living too long,’ thereby potentially shortening the time horizon in which participants need to make their assets last,” the company states on its site. “Because of the guarantee of the annuity, participants have greater flexibility to spend early in their retirement.”

The feature is compared to a pension-like feature for DC plans — something that could appeal to colleges and universities that also provide their employees with defined-benefit plans and are more familiar with lifetime income.

“People are living longer, with smaller pensions due to shorter job tenures,” University of California chief investment officer Jagdeep Singh Bachher said in the announcement. “Given market volatility, there’s now a strong need for a supplemental source of guaranteed income in the later years of life.”