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Employers’ Interest in Next-Gen TDFs Increases Slightly

Target Date Funds

Since the start of the pandemic, plan sponsors appear to have become less sure that traditional target date funds meet employees’ retirement needs and are expressing interest in the next generations of TDFs. 

In polling more than 1,500 employers and employees, TIAA’s 2022 Retirement Insights Survey revealed that 66% of employers feel TDFs will help employees meet their retirement income needs through retirement, down from 78% in a previous survey in 2020. 

Employers are also slightly more concerned about their employees “not saving enough for retirement” (66% in 2022 versus 57% in 2020) and “risking outliving their savings” (63% in 2022 versus 58% in 2020). Consequently, nearly three-quarters of employers (72%) now say they are highly interested in a new generation of TDFs geared towards some allocation of lifetime income, TIAA found. In fact, several firms have rolled out next-gen TDFs over the past several months, including Vanguard, Nationwide and the Capital Group, to name a few.   

“Employers are beginning to recognize several critical shortcomings of traditional target-date funds and now seek retirement offerings that safeguard their employees’ savings and provide options for guaranteed monthly income for life,” says Colbert Narcisse, chief product and business development officer at TIAA. “Plan sponsors can better help participants by providing new customized target-date solutions that offer greater personalization and include access to guaranteed income in retirement that cannot be outlived.” Narcisse adds that these solutions can also help dampen portfolio volatility in a rising interest rate environment.

One positive from the survey is that 77% of employees continue to say that saving for retirement is their top priority, though more than half (51%) say the pandemic has increased their anxiety about their ability to retire when they want. In addition, slightly more employees say they are “very” or “extremely” interested in Guaranteed Lifetime Income (GLI) within retirement plans as compared to 2020 (54% in 2022 versus 51% in 2020) and nearly half (48%) say their interest increased during the pandemic.

Access and Cost Barriers

In addition, while most employers give their company’s retirement plan high marks, the feature they think is most lacking is access to guaranteed lifetime income (38%). TIAA observes that this is an issue as 35% of employers say the purpose of retirement plans is to provide employees secure income through retirement versus 20% who say it’s a vehicle to help employees save/accumulate and 45% who say both equally.

Still, only about a third of employers (34%) currently offer GLI options and only 38% say they are familiar with provisions in the SECURE Act that would improve access to in-plan GLI. Most employers (85%) who are familiar with and already offer in-plan GLI options say they are valuable for employees. Among those not currently offering GLI options, 43% say they are extremely or very interested in GLIs.

Moreover, perceived cost is still a primary barrier for nearly half (48%) of employees. Employers recognize this and view the products as being complicated and hard to understand as issues. In fact, 82% of employers cite cost as a reason they are not interested in in-plan GLI, followed by hard to understand (72%). 

When participants are asked how their interest in investing in a GLI annuity would change if it was offered at a lower cost through their company’s retirement plan, 73% of respondents said they would be more interested. TIAA suggests that employers will need to emphasize the lower costs of these options in-plan versus outside of their plan to appeal to employees.  

Additional findings from the survey show that less than half of plans (41%) are offering auto-enrollment or auto-escalation. Sponsors should consider adding these provisions ahead of the SECURE Act 2.0, which allows for increased participation rates and further simplifies plan administration, TIAA suggests. 

Another element sponsors can consider including is income projections, which are perceived as helpful by most employees (72%).