Next generation of retirement plan investment options help participants target lasting income in retirement
NEW YORK, January 25, 2017 – TIAA, a leading financial services provider serving the nonprofit sector, today announced the introduction of Custom Default Solutions.
A complement to the TIAA-CREF active and index Lifecycle Funds, these next-generation defined contribution plan investment solutions are designed to help improve retirement outcomes by adding a guaranteed income component through a custom target-date model structure, or by a model portfolio constructed to deliver a target level of income.
The custom solutions are Target Date Plus Models and Target Income Models. Plan sponsors and/or their third-party consultants develop the models (selection of investment options and glide paths) and assign participants to the models using TIAA’s recordkeeping platform.
Positive Retirement Outcomes
“Lifetime income has been a central part of TIAA’s retirement plans since our founding, and we continue to look for innovative solutions to help deliver positive retirement outcomes for participants,” said Ron Pressman, CEO, TIAA Institutional Financial Services. “Our research shows that 72 percent  of employees want guaranteed lifetime income. Yet, primarily through defaults, many new participants contribute to target-date funds without an income focus. We brought these two insights together to offer plan sponsors a way to help participants improve outcomes in retirement without increasing risk.”
These solutions come at a critical time for American savers. Individuals are living longer: According to the National Center for Health Statistics, the average life expectancy of a 65-year old increased by 18 percent between 1980 and 2013—from 16.4 to 19.3 years. At the same time, defined-contribution plans have replaced defined-benefit plans as the primary retirement savings vehicle for most Americans, placing the responsibility of saving and planning for lifetime income squarely upon plan participants. This has resulted in recent guidance from government regulators encouraging plan sponsors to consider lifetime income solutions and annuities.
Defined-contribution plans often include target-date funds which simplify the investment decision-making process for employees but, despite common belief, they do not provide guaranteed income in retirement. In addition, many defined-contribution plans focus on account value and rates of return, rather than creating a sustainable and secure stream of retirement income.
“To date, most target-date funds do a good job helping participants accumulate retirement savings. However, they don’t provide guaranteed lifetime income in retirement, which can leave many with the tough task of stretching a lump sum of retirement savings over the course of a retirement that potentially could last decades,” said Pressman.
TIAA research has found that 49 percent of Americans say their retirement plan’s No. 1 goal should be to provide guaranteed monthly income in retirement, but 41 percent are unsure if their current plan provides an option for lifetime income.
“We wanted to offer our clients the opportunity to provide a default solution that reinforces the importance of income in retirement. These solutions leverage investment components aimed at increasing certainty and help reduce the real risks retirement plan investors face,” said David De Tagyos from Strategic Retirement Partners in Shorewood, Illinois.
Retirement Income Two Ways
Custom Default Solutions include two innovative, flexible options to meet the need for retirement income, while keeping the participant experience simple. Unlike one-size-fits-all target-date funds, these solutions allow plan sponsors to create customized asset allocation and income solutions to better meet the specific needs of their employees.
Target Date Plus Models substitute standard bond funds with a guaranteed fixed annuity, such as TIAA Traditional, that provides certainty of income, within the familiar target-date structure. These models typically follow the automated glide path many participants expect. However, plan sponsors and their consultants can use their own in-house expertise to manage the glide path and investment options to fit the specific demographics of their participants.
“With Target Date Plus Models, we can leverage TIAA’s open architecture platform to combine best-in-class mutual funds with TIAA Traditional,” said Pete Kaplan and Brian Petros, President and CEO of PKFinancial Group in Twinsburg, Ohio. “In addition to guaranteed income in retirement, TIAA Traditional offers a proven historical crediting rate, reduced volatility compared to bond funds and a guaranteed minimum rate of return.”
Target Income Models aim to replace a specific portion of income in retirement using the same investment approach of many defined-benefit plans: a liability-driven investment (LDI) strategy.
“An LDI strategy focuses on managing retirement income volatility to provide more certainty about achievable retirement outcomes,” said Vern Cushenberry from Two West Advisors in Kansas City, Missouri. “Target Income Models allow for customization that goes beyond age to incorporate savings habits, additional income sources and custom retirement dates.”
Participants are seamlessly moved among multiple glide paths based on their personalized funding ratio, income replacement goal and market conditions. The models in this solution become more conservative over time, similar to target-date funds. However, Target Income Models balance growth assets with income-hedging assets, primarily through high-quality Treasury Inflation-Protected Securities (TIPS) to lessen the impact of interest rate and inflation risk on retirement income. Leveraging the work of Nobel Prize winner Robert C. Merton, TIAA licensed the solution framework from Dimensional Fund Advisors (Dimensional).
“As retirement plans continue to evolve to meet the needs of today, we believe Target Date Plus Models and Target Income Models both represent important options to help plan sponsors, consultants and participants accomplish their retirement income goals,” said Pressman.
Target Date Plus Models and Target Income Models are eligible to be selected as Qualified Default Investment Alternatives (QDIA). To learn more about Custom Default Solutions, visit here.
TIAA (TIAA.org) is a unique financial partner. With an award-winning* track record for consistent investment performance, TIAA is the leading provider of financial services in the academic, research, medical, cultural and government fields. TIAA has $907 billion in assets under management** (as of 12/31/2016) and offers a wide range of financial solutions, including investing, banking, advice and guidance, and retirement services.
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*The Thomson Reuters Lipper Large Fund Award is given to the group with the lowest average decile ranking of three years’ Consistent Return for eligible funds over the three-year period ended 11/30/12, 11/30/13, 11/30/14 and 11/30/15, respectively. TIAA was ranked among 36 fund companies in 2012, 48 fund companies in 2013 and 2014, and 37 fund companies in 2015 with at least five equity, five bond or three mixed-asset portfolios. Classification averages are calculated with all eligible share classes for each eligible classification. The calculation periods extend over 36, 60 and 120 months. The highest Lipper Leader for Consistent Return (Effective Return) value within each eligible classification determines the fund classification winner over three, five or 10 years. A detailed awards methodology can be found at excellence.thomsonreuters.com/award/lipper. For current performance and rankings, please visit the Research and Performance section on TIAA.org. Past performance does not guarantee future results.
** Based on assets under management across Nuveen Investments affiliates and TIAA investment management teams.
Robert C. Merton provides consulting services to Dimensional Fund Advisors LP.
David de Tagyos offers securities through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC and investment advisory services through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with TIAA, Strategic Retirement Partners or any other entity listed.
Third party consultant comments expressed in this press release are their own.