Paycheck for life? New guaranteed income offering may be a 'gamechanger' for 401(k)s
Asset manager BlackRock has launched LifePath Paycheck, which gives employees access to guaranteed income through a target date fund, allowing DC plans to switch some of an enrollee’s investments into an annuity at age 55.
BlackRock, the No. #1 investment manager in the world, made headlines recently when it announced its new LifePath Paycheck, which will provide regular payments similar to pensions to participants. The development comes at a time when many Americans are feeling financially insecure about retirement, and the option of a guaranteed incomed plan has become increasingly popular.
“A top concern among American workers is the fear of running out of money during retirement. And yet the industry has focused on helping people understand they need to save – but not how to manage spending in retirement, even as companies have shifted from defined benefit to defined contribution plans,” said Anne Ackerley, Head of Retirement at BlackRock. “With this solution, we’re rethinking retirement. And part of that was working across the industry to build something new.”
The new product will offer access to guaranteed income through a target date fund; allowing DC plans to switch some of an enrollee’s investments into an annuity at age 55. The allocation can then grow to 30% of the portfolio by age 65. Participants will have the option to choose an annuity with their allocation starting at age 59.5 until they turn 72. If employees in the plan choose not to buy an annuity, the 30% allocation is put into target-date funds.
A new twist to an old idea
The concept of taking on more risk early in one’s working years and then switching to safer investments and annuities closer to retirement is not a new one. The BlackRock product innovates by combining the strategy into a single product.
Bryan Hodgens, research director for distribution and annuities at LIMRA, noted that similar products have been appearing in the market in recent years, partly because of the appearance of the SECURE 2.0 law, which built more regulatory space for such products.
“Products with annuities embedded into a target date fund are not new—the reason you see the headlines is because it’s Black Rock. It’s the largest asset manager in the world, they’re very big in the DC marketplace,” he said. “I think it will pull others along with it, there will be a drafting effect. We will see more products develop, but it’s always hard to predict how far and how fast.”
Behind the headlines about the BlackRock rollout has been years of slow change and innovation, Hodgens said, adding that the industry has evolved and now has the technology and infrastructure to support a more complex product. “The building blocks around it is probably the real story—the SECURE Act, the education, the technology, that’s what’s gotten us to this point.”
Hodgens also stressed that the introduction of these new products was made possible by employers getting more familiar with the concepts around guaranteed income products. “Employers have become more educated in recent years and that’s been really important,” he said. “The education component is a big trend. Annuities are almost always sold through an advisor, and that’s because that education has to take place.”
“Wait-and-see” mode
There are still some questions about how well these products will play out in the long run, with some saying that their cost, complexity, and choice (or lack thereof) are the “three c’s” that may keep some plan sponsors on the fence.
In a Wall Street Journal analysis of the BlackRock announcement, one expert said that many employers are in a “wait-and-see” stance. “There are fees in the spread of the annuity that you can’t see. That opaqueness opens itself up to the chance of litigation risk,” Jason Kephart, director for multi-asset ratings at Morningstar, told the Journal.
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However, if BlackRock’s LifePath Paycheck becomes regarded as a success, those doubts may fade. “If you start to see a lot of momentum with the BlackRock series, it won’t be long before more plans offer these,” Kephart said.
The reviews from early adapters have been good, at least from the information shared by BlackRock. “LifePath Paycheck is a game changer in our effort to attract, retain, and empower talent,” said Paul Visconti, senior director of total health and retirement programs at Avangrid, a sustainable energy company that has implemented LifePath Paycheck. “By taking some of the guesswork out of financial planning, we’re enabling our employees to focus on what they do best – accelerating transformation for our customers and communities by pioneering a brighter clean energy future.”