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DC Asset Managers See New Opportunities with Retirement Income Products

Retirement Income

With retirement income becoming a top-of-mind issue in the defined contribution investment-only (DCIO) asset manager community, annuities apparently are gaining traction as an embedded component of target-date funds (TDFs), according to a new report from Cerulli.  

Since passage of the SECURE Act at the end of 2019—which includes lifetime income provisions intended to remove barriers to offering lifetime income products in DC plans—several asset managers have come to market with new guaranteed income—and non-guaranteed—retirement income products for the DC market.

In fact, one in four target-date managers now offer a TDF with an annuitization component, according to The Cerulli Report—U.S. Defined Contribution Distribution 2022: Tailoring Solutions to the Consultant-Intermediated Fiduciary Landscape

From a product development standpoint, a target-date series with embedded annuities is the most common retirement income approach, the firm notes. “The importance of a simple, streamlined approach to crafting guaranteed income products for the litigious, fee-sensitive DC market cannot be overstated,” says Shawn O’Brien, Associate Director at Cerulli. 

When considering in-plan retirement income products, DC consultants are most likely to recommend a TDF with a guaranteed income component (68%), followed by a TDF with an income vintage (50%) and a managed account (36%).

“Consultants’ strong preference for target-date products with an embedded annuity may be, in part, a reflection of the sheer number of new target-date funds with embedded annuities available in the market today and plan sponsors’ comfortability with the target-date structure,” O’Brien further observes.

Stigmas Persist  

Yet, despite the recent proliferation of new guaranteed income products, asset managers are split on whether an effective retirement income solution requires a guaranteed component.

To that end, more than 8 in 10 (82%) asset managers agree that annuity products have a negative stigma associated with their cost, complexity and/or illiquidity.

Moreover, while retirees’ retirement income preferences vary considerably from one investor to the next, retirees tend to favor flexibility, the opportunity for asset growth and working with an advisor over guaranteed income, Cerulli further emphasizes.

“Retirees are a heterogeneous cohort and transitioning from working and saving to spending in retirement is such a personal matter that no one product or solution will satisfy the needs of all retirees. Nevertheless, cost-conscious retirement income solutions that distill complicated saving, investment, and spend-down considerations into straightforward, concise participant experiences are most likely to win favor from plan sponsors and consultants,” explains O’Brien.

While some of the recently launched retirement income products and solutions are a step in the right direction—improving upon the traditional target-date and managed payout structures—Cerulli maintains there is plenty of room for innovation.

In the years ahead, the firm expects DC asset managers to periodically revisit their retirement income product and solution offerings, augmenting their existing offerings or building new ones from scratch, with an eye toward personalization.

“As the cost of personalization comes down, there’s a compelling case to be made for personalized, advice-based retirement income solutions. For asset managers that go this route, recordkeeper integration will be a major challenge—particularly with recordkeepers that actively seek to transition participants into individual retirement accounts (IRAs), retail advice solutions, or wealth management relationships,” O’Brien concludes.