Building The Roads To Retirement

Is Your Love Affair With Target Date Funds Cooling Off?

A better tool just might change the game in the 403(b) marketplace

by David Swallow

For decades, retirement plan sponsors have relied on target-date funds (TDFs) as the default investment option or qualified default investment alternative (QDIA) for their employees.

But a recent TIAA study that polled more than 1,500 employers and employees suggests the love affair with traditional TDFs could be cooling off and that it may be time for a change.

A closer look at the 2022 Retirement Insights Survey findings:

Employers see the top features of their company’s retirement plan as:

  • Employer contributions (64%)
  • Costs to employees (46%)
  • Investment options available (44%)

However, the feature employers think is most lacking is access to guaranteed lifetime income (38%).

  • This is an issue as 35% of employers say the purpose of a retirement plan is to provide employees secure income through retirement (vs. 20% who say a vehicle to help employees save/accumulate and 45% who say both equally).

Source: 2022 TIAA Retirement Insights Survey.

Results from the TIAA Retirement Insights survey, released in April 2022, revealed that 66% of employers feel TDFs will help employees meet their retirement income needs, down from 78% in a previous survey in 2020.

At the same time, the study also shows that almost three-quarters of employers (72%) now say they’re highly interested in a new generation of TDFs or default options that gear some portion of their savings towards lifetime income.

Among plan sponsors overall, 63% are concerned about participants outliving their retirement savings. Further, the plan feature that plan sponsors think is most lacking is access to guaranteed lifetime income (38%), the TIAA survey reported. While few employers (34%) currently offer guaranteed lifetime income options, among employers who are familiar with and already offer such in-plan options, 85% say they are valuable for employees.

Developing New Products To Address Employer Interest

We recently introduced our Secure Income Account (SIA) model, which, for the first time, offers our guaranteed lifetime income solutions to the corporate 401(k) retirement market. A deferred fixed annuity, the SIA provides a predictable, steady stream of lifelong guaranteed income, specifically as an allocation within managed accounts or custom target-model portfolios in 401(k) plans. As part of a plan’s QDIA, the SIA enables plan sponsors to automatically direct participants to the investment, helping them to start saving lifetime income earlier in their accumulation years. This innovation was prompted by the passage of the SECURE Act in 2019, which enhanced regulatory protections for including annuities in 401(k) plans.

We’re also offering RetirePlus for the 403(b) market. Tightly aligned with an urgent client need in the 403(b) marketplace, RetirePlus enables a consultant to show continuing value to current clients as well as present a differentiated proposition to potential clients. It also provides opportunities to bring new, innovative ideas to clients and prospects and diversify their revenue sources. In an increasingly competitive consulting environment, these are no minor considerations.

Addressing The Shortcomings Of Traditional TDFs

Since their introduction in the 1970s, more companies have adopted 401(k) plans in place of traditional pensions. Of the 67% of private industry workers who said they had access to retirement plans in 2020, just 12% reported that they had access to both pension plans and DC plans. More than half (52%) said they had access only to DC plans.

But there’s one big problem with 401(k)s: They weren’t intended to be the sole income vehicle in retirement or the primary retirement plan. They were created as a “supplemental savings plan” to provide an additional opportunity to save. However, that has significantly changed – and now that they are, in many cases, replacing defined benefit (DB) plans despite most plans not being able to provide DB-like benefits to invest in income-generating annuities.

The pendulum is shifting once again away from traditional TDFs as more employees become interested in in-plan guaranteed lifetime income options. You should have this timely conversation with forward-looking clients at the earliest to improve participants’ retirement outcomes...

For many workers, the result has been a “guarantee gap.” Today, 40% of Americans run the risk of running out of money in retirement. In-plan lifetime income guarantee solutions can address the longevity that many Americans face and give them confidence for the next chapter.

The Pendulum Is Swinging

For the last 10-plus years, the effort – whether through regulation, legislation, or menu design – has been to make 403(b) plans look more like 401(k) plans. But this pendulum is now swinging the other way as interest in guaranteed lifetime income increases.

Recognizing the retirement-income savings and guarantee gaps, legislators and regulators are implementing policies to focus on enhancing Americans’ retirement income. Legislation, such as the SECURE Act of 2019 and SECURE 2.0 – now working its way through Congress – are focused on outcomes and securing retirement income, as well as driving 401(k) plan designs to be more like the plans the 403(b) market has been using for 50-plus years. This seismic shift presents significant opportunities to bring value-added consulting and innovative solutions.

403(b) Sponsors Want To Upgrade The Default

As more employers grow skeptical of TDFs’ ability to set up employees for success in retirement, and the benefits of an income-oriented default continue to draw recognition across the DC marketplace, our market research indicates 403(b) sponsors are clearly ready to make a change, as well.

Putting an even finer point on the 403(b) opportunity, these sponsors are more likely than their 401(k) peers to be concerned about their employees not saving enough to last through retirement as well as their overall financial literacy, according to the TIAA survey. And while 401(k) sponsors are focused on lowering costs and replacing low-performing investments, 403(b) sponsors are most concerned about upgrading the default option and prioritizing retirement preparedness.

A Step Up For 403(b) Plans

RetirePlus is unmistakably a step up for any 403(b) plan currently offering an off-the-shelf TDF with indexed investments and no customization as its QDIA. RetirePlus is a service that provides the ability to leverage the plan’s core investment options and include a fixed annuity with a guaranteed rate of return at no additional cost to participants. 

RetirePlus has already proven itself in the field with extraordinary, tangible impact for participants. In one case, a 403(b) sponsor that implemented RetirePlus saw an increase of $87,000 in participants’ average projected balance at retirement after two years, more than twice as many participants with access to guaranteed lifetime income, and a 24% increase in participants’ average projected annual income.

RetirePlus also offers the chance to fortify a client relationship by offering:

  • Continuing value: In a long-term advisory relationship, a consultant likely has long since addressed the core needs of appropriate fund selection, fee management, and exercise of key fiduciary responsibilities. But service pressures don’t abate. Bringing RetirePlus to the table – at a time when many 403(b) sponsors are urgently seeking such an upgrade – reinforces the consultant’s ongoing worth and lasting commitment to the impact and success of the client’s retirement offering.
  • A differentiated proposition: Knowledge and deployment of approaches such as RetirePlus are growing throughout the consultant community but are not yet universal. For many prospective clients, RetirePlus will represent a fresh take – one that perhaps no other consultant has yet presented – on one of their knottiest problems: how best to equip participants to generate lifetime income. It’s a highly effective way to make a consulting offer distinctive, even differentiated, from the beginning of the conversation.
  • Impacting a significant number of participants, while also providing an opportunity for recurring revenue: One of RetirePlus’ most striking features is the customization of model portfolios on a participant-by-participant basis – tailor-made for the involvement and support of an experienced consultant who can lead the sponsor through the ins-and-outs of the customization and drive the actual portfolio design process as needed. With the focus in the marketplace on solutions, such as advisor managed accounts and other managed solutions, these options are good alternatives. But due to the fees associated with these solutions, the data recognizes these solutions are not being adopted in most cases as the QDIA. Thus, these solutions benefit a small percentage of the population (those who opt in and pay a fee), while RetirePlus is a free service used as the QDIA and has a much larger and significant impact on participants.

The advantages are compelling but, arguably, introducing a client – either current or prospective – to a RetirePlus-like approach also is simply the right thing to do, for both clients and employees. Outcomes are drawing increasing focus as an essential metric of effective retirement support, and rightfully so. By offering all employees the chance to build, over time, retirement income more secure than occasional savings withdrawals, solutions like RetirePlus can help generate more equitable retirement outcomes and prove a sponsor’s genuine dedication to their workforce’s retirement well-being.
With the stakes steadily rising for sponsors when it comes to safeguarding retirement security, consultants have few more powerful opportunities than to introduce clients – especially in the nonprofit/public sector – to the many pluses of in-plan, personalized annuitization.

The pendulum is shifting once again away from traditional TDFs as more employees become interested in in-plan guaranteed lifetime income options. You should have this timely conversation with forward-looking clients at the earliest to improve participants’ retirement outcomes.




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TIAA RetirePlus Select

TIAA RetirePlus Select is an asset allocation program that includes asset allocation models that a plan participant may choose to guide the investment of his or her account into underlying investment options selected by the plan sponsor (the “underlying investments”). The plan sponsor selects the specific underlying investments available under its plan to represent the various asset classes in the models. An independent third-party advisor engaged by Teachers Insurance and Annuity Association of America (“TIAA”) developed the target asset class ratios for the models and the TIAA RetirePlus Select is administered by TIAA as plan recordkeeper. In making TIAA RetirePlus Select available to plans, TIAA is not providing investment advice to the plans or plan participants.
The target asset class ratios for a plan participant’s model-based account will become more conservative over time as the plan participant’s years to retirement decreases. For information regarding the changes to the target allocations please contact TIAA. An account’s actual allocation percentage to an underlying investment may vary from the target allocations due to the performance of the underlying investments or other factors. Accounts invested in accordance with the models will be rebalanced to the applicable target allocations periodically. The underlying investments included in a model are subject to change and may not be representative of the current or future underlying investments for the model. Some or all of the underlying investments included in a model may be sponsored or managed by TIAA or its affiliates and pay fees to TIAA and its affiliates.
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The TIAA RetirePlus Pro Models are asset allocation recommendations developed in one of three ways, depending on your plan structure: i) by your plan sponsor, ii) by your plan sponsor in consultation with consultants and other investment advisors designated by the plan sponsor, or iii) exclusively by consultants and other investment advisors selected by your plan sponsor whereby assets are allocated to underlying mutual funds and annuities that are permissible investments under the plan. Model-based accounts will be managed on the basis of the plan participant’s personal financial situation and investment objectives (for example, taking into account factors such as participant age and risk capacity as determined by a risk tolerance questionnaire).
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