DC Asset Managers Ramp Up Retirement Income Product Development Efforts

October 20, 2022 — Boston

Three-quarters of plan sponsors advised by institutional investment consultants prefer, or actively seek, to keep retiree assets in plan, creating new distribution opportunities for asset managers

As retirement income becomes the most top-of-mind issue in the defined contribution investment-only (DCIO) asset manager community, annuities are gaining steam as an embedded component of target-date funds. According to The Cerulli Report—U.S. Defined Contribution Distribution 2022: Tailoring Solutions to the Consultant-Intermediated Fiduciary Landscape, one in four target-date managers offers a target-date fund with an annuitization component.

In the 36 months following the passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act—which includes well-documented 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 defined contribution (DC) market. A target-date series with embedded annuities is the most common retirement income approach from a product development standpoint. “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.

When considering in-plan retirement income products, DC consultants are most likely to recommend a target-date fund with a guaranteed income component (68%), followed by a target-date fund 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,” according to O’Brien.

Despite the recent proliferation of new guaranteed income products, asset managers are split on whether an effective retirement income solution requires a guaranteed component. More than three-quarters (82%) of asset managers agree that annuity products have a negative stigma associated with their cost, complexity, and/or illiquidity. Furthermore, 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. “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,” he notes.

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, Cerulli 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,” he concludes.

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