A 401(k) with an annuity twist –  Blackrock’s funds offer paycheck-like income option

A growing list of companies have begun offering investments inside their 401(k) plans that promise a way for workers to generate steady income during retirement. 

These investments combine target-date funds, a popular 401(k) investment, with annuities, an insurance contract that promises a stream of lifetime payments.   

Global asset manager BlackRock is leading the way with these revamped funds after debuting its LifePath Paycheck strategy in April. 

So far, 14 companies have made the hybrid funds available as the default option in their 401(k), giving about 500,000 employees access nationwide. Funds are currently only available for U.S. employers to provide to their employees through defined contribution retirement plans, like 401(k)s.

How target-date funds with annuities work

Target-date funds have emerged as a popular way for retirement savers to invest their 401(k) contributions. These one-stop funds automatically adjust an investor’s asset allocation based on their projected retirement date. They start with a higher percentage of stocks — riskier but capable of fetching higher returns — when an employee is young, then gradually shift toward safer investments, like bonds, as retirement approaches.

With LifePath Paycheck, the target-date fund also includes an annuity component. Starting at age 55, a portion of the invested money is automatically allocated toward annuity contracts. By age 65, roughly 30 percent of the portfolio could be earmarked for fixed individual retirement annuities. 

Between ages 59½ and 72, employees have the option to purchase an annuity — payable by insurers selected by BlackRock — using the allocated funds. 

The remaining 70 percent of the portfolio stays invested in stocks and bonds, and can be withdrawn as needed in retirement.

If an employee chooses not to purchase an annuity, the 30 percent allocation simply functions like a standard bond allocation within the target-date fund.

Brighthouse Financial and Equitable are the initial insurers partnering with BlackRock to provide annuity contracts for LifePath Paycheck.

BlackRock said participants will be able to purchase annuities from its partners through MyLifePath, its new digital platform for the funds, after successfully completing each insurer’s application process.

Equitable noted that the in-plan annuity market “is an area of growth” for the company, which has been providing these products in workplace retirement plans since 2007. 

The key potential benefit for retirement savers

About 56 percent of American workers said they feel behind where they think they should be on retirement savings, including 37 percent who feel “significantly behind,” according to a 2023 Bankrate survey. 

While 401(k) plans offer flexibility and tax advantages for retirement savers, they also come with a lot of choices — how to invest the money and then, how to turn that nest egg into a steady income stream in retirement.

Proponents of annuities say they offer a solution to a common concern — outliving your savings in retirement. While Social Security provides a reliable paycheck, pensions are increasingly rare, putting the onus of securing reliable income and managing withdrawals on retirees. 

An offering like LifePlan Paycheck puts the burden of longevity risk on the insurer, not the employee, and takes some of the guesswork out of managing income in retirement. 

It also makes purchasing an annuity more frictionless for workers with access to these funds. 

BlackRock CEO Larry Fink described the funds in the company’s annual 2024 letter to shareholders as “a revolution in retirement” that he believes will “one day be the most used investment strategy in defined contribution plans.”

Fees 

Fees employees pay for LifePath Paycheck are negotiated with their employers directly, and BlackRock doesn’t provide specific fund expenses for LifePath Paycheck on its website. 

However the company said the product is priced similarly to BlackRock’s LifePath Index target-date fund, which charges an annual expense ratio of about 0.13 percent and a net expense ratio of 0.09 percent. 

BlackRock says plan participants won’t be charged commissions, sales loads, distribution fees or surrender charges, whether or not they exercise the option for guaranteed lifetime income.

This would stand in stark contrast to traditional annuities, which are notorious for high fees and hidden commissions. 

“BlackRock seems to have done a good job with this option. It’s giving annuities an easy button,” says Joe Conroy, a certified financial planner and owner of Harford Retirement Planners in Bel-Air, Maryland. 

But Conroy says he still has questions. 

“I’d want to see the payout on this product first,” he says. “What’s the rate of return people can expect if they opt into the annuity feature? That’s still unclear.”

Other concerns

One concern about LifePath Paycheck is that consumers aren’t as familiar with annuities, so it might be difficult for the average person to understand what they’re really signing up for. 

“I think annuities in a 401(k) plan is a bad idea for investors,” says John Bovard, a certified financial planner and owner of Incline Wealth Advisors in Cincinnati. “This should be something investors can consider on their own, but not in 401(k) plans.”

Bovard points out that many 401(k) investors are placed into target-date funds by default, and might not go into their account and change their investments. 

“If annuities are in target-date funds, investors could be in annuities without really understanding how they work,” says Bovard. 

Because annuity payouts are backed by the issuing insurance company, fund participants also face a counterparty risk. 

“At the end of the day, you’re banking on the insurance company’s — not BlackRock’s — guaranteed ability to pay you income for life,” says Conroy. 

Consumers should always scrutinize the life insurance company providing an annuity, and only pick an insurer with the highest quality standards, he added.  

Conroy also recommends employees meet with a qualified financial advisor ahead of retirement. 

“Before you convert that 30 percent of your 401(k) into an annuity, have an advisor help you shop around for other annuity quotes,” he says. “Your fund might be the best deal out there, but you won’t know until you look.”

Will other plan administrators follow BlackRock?

While BlackRock is the first major retirement plan administrator to offer these redesigned funds, it’s unclear if or when other companies will join in. 

And since the long-term track record of target-date funds with annuities is unknown, employers may want to see more data before offering them to their employees.

The two other retirement giants, Vanguard and Fidelity, have yet to announce similar products, suggesting that the market for these hybrid funds is still evolving.

LIMRA, the largest trade association for the insurance industry, says it expects greater adoption of in-plan annuities throughout 2024. Currently, only about 14 percent of defined contribution plans offer a guaranteed income option.