A new challenge is emerging in the U.S. retirement landscape. While many people now understand the importance of saving for retirement, there is limited guidance on transitioning from saving during working years to spending in retirement years. According to a recent McKinsey retirement report, only 19% of pre-retirees are likely to be fully financially secure, highlighting the magnitude of this challenge.
Over the past decade, according to Carulli, U.S. retirement account balances have grown to $23 trillion. Despite the asset growth, many individuals feel unprepared and lack the necessary assets and financial knowledge as they approach retirement. This gap presents opportunities for financial services firms to innovate and provide better solutions.
Recently, annuities have surged in popularity for retirement planning. These insurance products offer a guaranteed income stream during retirement years, helping eliminate the risk of outliving savings, assuming retirees can bear the traditionally high price of annuities. Annuities have gained traction, as traditional pensions cover fewer people, by offering a pension-like reliable income on autopilot—many retirees prefer a monthly check even if the cost of the financial engineering to produce the monthly check results in a smaller check to them. Sales of fixed-rate deferred annuities, in particular, have more than tripled in the last two years, rising to $164.9 billion in 2023 from just over $50 billion in both 2020 and 2021, according to LIMRA.
With inflation cooling and the Fed potentially cutting rates in 2024, people are seizing what could be the last chance for some time to secure rates around 5 percent. Nevertheless, annuities have always been seen as costly, with commissions typically falling between 1% and 10% of the contract amount, depending on the annuity type. For example, fixed-indexed annuities generally earn RIA’s a 4% upfront commission.
Earlier this year, BlackRock
BlackRock
announced the launch of an annuity option for its $470 billion LifePath target-date fund series, which the company has identified as key to its future growth. The LifePath Paycheck option, developed over five years, is currently available only in defined contribution plans. Anne Ackerley, head of retirement at BlackRock, has expressed a desire to extend this option to those without DC plan access, potentially through an ETF or mutual fund in the future.
BlackRock’s LifePath Paycheck is designed to provide a monthly income stream during retirement. These funds begin investing in annuity contracts at age 55, growing to about 30% of the portfolio by age 65. Employees have from age 59.5 until the year they turn 72 to buy an annuity with this allocation, securing a lifetime monthly paycheck. The remaining 70 percent can stay invested in stocks and bonds or be redeemed for cash.
BlackRock offers these funds to simpify and reduce annuity costs for individuals saving for retirement, with an annual expense ratio of 0.1% until age 55, increasing to 0.16% when the annuity contracts are added.
.Annuities are complex, and their embedded spread expense from the insurance company can be a concern for target-date funds using them. LifePath Paycheck currently buys annuity contracts issued by Equitable and Brighthouse Financial.
In spite of several similar products on the market, BlackRock’s LifePath Paycheck funds have seen significant adoption. As of the end of April, 14 employers with plans totaling $27 billion in target-date assets have committed to making LifePath Paycheck available to 500,000 employees, according to a press release by Equitable.
In summary, most Americans valued the security of receiving monthly retirement checks from traditional pension plans, but these plans are rarely available to today’s workforce. Yet many still seek the peace of mind that comes from knowing they will not outlive their retirement savings.
For BlackRock, LifePath Paycheck showcases their continued leadership in offering innovative retirement solutions, and generates higher fee income for the firm. For retirees, LifePath Paycheck offers the assurance of monthly retirement payments through annuities. Generally, this author is not a fan of annuities. However, the retirees who choose annuities as part of their retirement funding will benefit from BlackRock’s economies of scale, significantly reducing the cost of purchasing the annuity component compared to individually working with a commissioned insurance company. Still, annuities remain insurance contracts with opaque pricing. As this retirement investment sector evolves, it will be interesting to see the different approaches to providing monthly payments that may emerge.
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