BlackRock Launches Service to Include Annuities in 401(k) Plans

BlackRock said it will soon begin offering a guaranteed stream of income for life in 401(k) plans by embedding annuity contracts directly into a target-date strategy.

The world’s largest asset manager said five large plan sponsors with more than $7.5 billion in target-date investments are already planning to implement its LifePath Paycheck program as the default investment option in their employees’ retirement plans. The annuities will initially be issued by insurers Brighthouse Financial and Equitable, with plan adoptions expected to begin in 2022.

The program offers plan participants the option to purchase fixed individual retirement annuities from the insurers, which will provide a guaranteed stream of income for life. Beginning at age 59.5, participants of an eligible retirement plan will be able to redeem their investment in LifePath Paycheck and withdraw a portion of their retirement plan savings. The amount would be approximately 30% of their LifePath Paycheck investment at age 65—and they will be able to purchase annuities from insurers selected by BlackRock.

The firm says the remaining retirement plan savings that are not used to purchase the annuities can be invested in a target-date fund (TDF) that is designed to complement the lifetime income stream paid by the insurers. The product is a diversified portfolio that has an asset allocation of approximately 50% equities and 50% fixed income. Participants can also choose to have the remaining retirement plan savings that aren’t used to purchase the annuities directed to another investment option in their retirement plan or redeemed for cash.

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Retirement plan sponsors have typically not offered annuities because the financial instruments are notoriously complex and have put employers at risk of being sued if the insurer that stands behind the annuity fails to make payments. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 protects employers that follow certain procedures from being sued if they select an insurance provider that fails to pay claims.

“As Americans are living longer and healthier lives, their risk of outliving their savings is accelerating,” Mark McCombe, BlackRock’s chief client officer, said in a statement. “By addressing spending and income in retirement, we’re working alongside our clients and partners to help more people address these challenges.”

According to research from insurance provider Voya, 90% of individuals say having a guaranteed source of income in retirement is important or extremely important.

The LifePath Paycheck program is subject to insurance regulatory approvals, finalization of commercial agreements, and plan sponsor adoption and implementation. The service will initially be available only to US employer-sponsored defined contribution (DC) plans that have each entered into an investment management agreement with BlackRock or its affiliates.