Target Date Funds With Annuities Can Be Prudent Default Investments

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By Sean Forbes

Target date funds with annuities can now be considered prudent default investment options, so long as certain liquidity requirements are met, the Department of Labor said in informal guidance.

Products and portfolios that include annuity features may not qualify as QDIAs but can still be prudent default options, the DOL said. However, participants and beneficiaries “must be able to transfer their assets ‘in whole or in part’ to any other investment alternative available under the plan with a frequency consistent with that afforded participants and beneficiaries who elect to invest in the QDIA, but not less than frequently than once within any three month period,” according to the DOL.

A QDIA is a default investment option chosen by a plan fiduciary for participants who fail to make an election regarding investment of their account balances, the DOL explained in a tip sheet for fiduciaries considering whether and which TDFs to include in their investment lineups.

The DOL was responding to a request from TIAA as to whether one of its products, which had liquidity restrictions beyond the department's requirements, would still qualify for use as a QDIA. It didn't, but Ron Pressman, TIAA's chief executive officer for Institutional Financial Services, still found the DOL's response encouraging.

“The Department of Labor guidance confirms that retirement plan sponsors can prudently default participants into retirement plan investment options that include lifetime income products,” Pressman said in a statement. “With longer lifespans and the burden of retirement saving increasingly on the shoulders of individuals, we believe retirement plan menus should offer investment options that provide guaranteed returns and allow for accumulated savings to be seamlessly converted into a guaranteed income stream that lasts a participant’s lifetime.”

TDFs have proven to be a favorite among younger workers, according to a 2016 study by the Investment Company Institute and Employee Benefit Research Institute. The ICI/EBRI study found that in 2014, 60 percent of 401(k) participants in their 20s held TDFs, compared with 41 percent of 401(k) participants in their 60s. The study also found that more than 70 percent of 401(k) plans included TDFs in their investment lineups and recently hired employees tended to invest in such funds.

To contact the reporter on this story: Sean Forbes in Washington at sforbes@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

For More Information

The DOL information letter is at http://src.bna.com/k4K.

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