New retirement product will allow workers to receive a stream of payments for the rest of their lives
A small number of 401(k) plans currently include annuities. Employers who offer retirement plans worry about the complexity of annuities and their cost — and can be sued if the insurer who stands behind the annuity fails to pay. The 2019 law now protects many employers from legal liability.
BlackRock’s offering is the first by a major asset manager since the law was passed. Electric utility Tennessee Valley Authority employees, car parts provider Advance Auto Parts Inc.
And employee retirement plans of three other companies will have the new annuity product as a default option. That means collectively about 100,000 American workers with $7.5 billion in workplace savings stand to eventually receive annuities in 401(k)-type plans.
The insurance industry has long promoted annuities as important retirement vehicles; A saver who accumulates stocks and bonds may survive with more than his assets, but an annuity keeps paying until death. One problem that remains is the cost: Since interest rates are so low, annuity buyers have to turn over a lot of cash for relatively small payments, and fees can add up.
BlackRock, which has $9.5 trillion in assets, is not an insurance company; Its plan annuities were initially provided by insurance companies Brighthouse Financial Inc. and will be issued by Equitable Holdings Inc.
BlackRock says it aims to use its influence to negotiate affordable group rates.
“We’re using our aggregation power against the insurance company to end up sitting between the individual and the insurer,” said Mark McComb, BlackRock’s chief customer officer.
The annuities will be part of a new range of BlackRock target-date fund offerings. Target-date funds are the default way many Americans save for retirement; According to Morningstar, US target-date mutual fund assets totaled $1.78 trillion in August.
Like other target-date funds, BlackRock’s new product will shift from a more stock-heavy to a bond-heavy mix as individuals age. It will also invest in a pool of annuity contracts over time. In addition, savers can also use 30% of their 401(k) balance to purchase their fixed annuity. They can make this choice between the ages of 59 and 72.
The new range of target-date funds, when offered through institutional accounts, will cost an employee about 0.1%, or $10 for every $10,000 managed. According to BlackRock, when the product starts investing in group annuity contracts, individual fees will increase but will be capped at 0.16%.
Fixed annuities traditionally charge about 1% of the account value. According to Morningstar, the average expense ratio for target-date mutual funds is 0.34%.
BlackRock, which manages more than $350 billion in target-date assets, says it expects to create mutual fund versions of the annuity offering in the future. Rival Vanguard Group, a major target-date fund provider, has not put annuities in such funds.
“We don’t believe in adding a ‘one-size-fits-all’ annuity allocation,” the world’s No. 2 asset manager said at the end of 2020.
About a decade ago, BlackRock couldn’t gain traction for a separate retirement product that included annuities. But a decade of ultralow interest rates and the continued decline of traditional pension plans make savings a major risk. According to a 2018 Wall Street Journal analysis, more than 40% of households led by people aged 55 to 70 lack sufficient resources to maintain their standard of living in retirement.
According to people familiar with the matter, at a 2018 meeting of top executives, BlackRock chief executive Larry Fink asked the firm to address the growing retirement problem. Shortly after, BlackRock launched Project Otto, named after Otto von Bismarck, the German chancellor who created a national pension scheme in the 1880s.
Over the years, BlackRock lobbied for legislation that would make companies more comfortable including annuities in 401(k)-type plans.
In 2019, BlackRock approached insurance companies as potential annuity providers for a new retirement product. BlackRock said insurers should only be paid through the spread between the yields they invest buyers’ money and the monthly payments they make to annuity holders.
“Some, perhaps more than others, understood what we were trying to achieve,” said Anne Ackerley, head of BlackRock’s retirement group.
BlackRock said plan participants will not pay commissions, sales loads or distribution fees for the annuity.
—Leslie Schism contributed to this article.
Dawn Lim [email protected]