BlackRock, the world’s largest asset manager, has announced plans to provide annuities through workplace retirement plans. According to The Wall Street Journal, annuities will be integrated into a new family of BlackRock “LifePath Paycheck” target-date funds. Five employers have agreed to make the new funds the default investment option in their plans beginning in 2022.

Like traditional target-date funds, the LifePath Paycheck funds will automatically adjust their asset allocations to become more conservative over time. However, when a participant hits age 55, a portion of the portfolio will shift to a new asset class, “lifetime income.” Participants could use this money to purchase a lifetime income stream via a fixed annuity, redeemable beginning at age 59 and a half.

Workplace retirement plans have long had the freedom to offer annuities, but few have. For many administrators, there were too many liability concerns. A provision in the 2019 Secure Act was designed to ease those fears by protecting employers from lawsuits if the annuity provider they select fails to pay claims.

At the time, Barbara Roper, director of investor protection at the nonprofit Consumer Federation of America, said, “Given the prevalence of high cost, low-quality annuities, we don’t start with the thought that this is a great idea.”

However, according to the Journal article, while fixed annuities usually charge a fee of 1% of the account value, the new BlackRock funds will start out charging 0.1%. As annuities are added, the fee will rise but will be capped at 0.16%

Is an annuity in a 401(k) plan a good idea?

BlackRock believes offering annuities through target-date funds will solve a problem that has plagued many workers since defined-contribution plans began replacing defined-benefit plans: How to turn retirement savings into a lifetime income stream.

However, it isn’t clear how the lifetime income portion of a participant’s portfolio will be invested while they are still working. An overly conservative approach, especially for those who plan to continue working past the traditional retirement age of 65, may not serve them as well as the freedom to invest more aggressively. Plus, those planning to buy an annuity in retirement might be better served by rolling their 401(k) plan balance into an IRA and then considering what would surely be a wider range of annuity options.

Still, it appears that annuities will eventually become common within target-date funds. According to a survey of target-date fund managers, 92% expect to include a deferred income annuity allocation in the future.

What are your thoughts on building annuities into target-date funds held in 401(k) plans?