By Neal Templin

Companies, many that long ago jettisoned their traditional pension plans, are rolling out hybrid target-date funds for their workers that provide pension-like income in retirement.

Now, retirees can get a monthly check for the rest of their lives.

"What's happening today is a major shift, and it's the biggest shift in the 401(k) industry since the advent of target-date funds 20 years ago," said Brendan McCarthy, who heads retirement for Nuveen, TIAA's investment management arm.

TIAA and AllianceBernstein were early to the party. TIAA began its hybrid target-date structure a decade ago and has $50 billion in assets in it; AllianceBerstein rolled out a hybrid target-date fund with a variable annuity for RTX workers in 2012.

BlackRock, JP Morgan, and others introduced hybrid target-date funds a few years ago after Congress passed legislation to improve retirement for all.

Traditional target-date funds use a low-fee blend of stocks and bonds to build wealth over decades -- much like pension plans. But workers in these funds are on their own when they retire and begin spending down their portfolios. There's no monthly check through good times -- and bad.

"Target-date funds are really good for the accumulation stage," said Jason Kephart, Morningstar's expert on target-date funds. "But they run the same issues you get anywhere else once you get into retirement. "

Target-date funds with annuities can make retirement less scary: more predictable income and more protection from market crashes or the risk that you outlive your savings.

"It really does create almost an easy button for a lot of Americans to create income for life," said David Blanchett, who heads retirement research for PGIM, the investment management company of Prudential Financial.

But the complexity of hybrid target-date funds poses new challenges: Fees and investments vary. Some provide the same monthly paycheck for the rest of your life; others have payouts that can rise over time or are linked to markets.

If you're interested in a hybrid target-date fund, consider these three things:

How much should you annuitize?

This is a big decision. You want enough income to cover essentials if the stock market crashes. Total up your Social Security check and any additional pensions. Then, compare that sum with your must-pay expenses -- housing, healthcare, insurance, utilities, and groceries.

The bigger the gap, the more you want to annuitize. In most cases, though, you only want to annuitize a portion of your nest egg. That leaves you with money for unexpected expenses like a new roof or a medical crisis.

Can you get your money back if you change your mind?

In a traditional lifetime annuity, you can't get your money back -- though some annuities permit unpaid balances to go to your heirs.

Many of the hybrid target-date funds are structured so you can pull out money -- often without any additional fee.

"We kind of solved for that buyer's remorse...," said Dan Oldroyd, who heads target-date strategies for J.P. Morgan Asset Management.

Optionality has a cost, though. The fees tend to be higher and payouts tend to be lower than a plain vanilla income annuity.

J.P. Morgan's hybrid annuity, for example, pays 4.25% a year at age 65. That's a good bit less than a traditional annuity. Oldroyd said this yearly payout should rise over time as the underlying investment -- a mixture of bonds and insurance guarantees akin to a 401(k) stable-value fund -- rises in value.

TIAA, meanwhile, offers annual payouts of 7.6% to roughly 9% for those who turn their target-date money into a lifetime annuity at age 65. Longtime customers get the higher payout, new customers get the lower one. TIAA also has a history of raising its payouts over time.

Are you taking on market risk?

While most of the hybrid target-date funds use some form of income annuities with relatively stable payouts, Alliance uses a variable annuity that contains a diversified portfolio of stocks and bonds. It will never go down in value, but it will go up every year if your account has risen.

Which is better? It depends on markets. If stocks rise, the variable annuity should produce a higher payout. If they don't, you'll probably do better with a single premium income annuity.

"There's a big trade-off...," said Jennifer DeLong, AllianceBernstein's head of defined contributions. "In this product, you're not giving up growth over time."

But hybrid target-date funds aren't for everyone. If you have enough Social Security and pension income to cover your expenses, you may not need extra guaranteed income. But if your spending could strain your savings, adding an annuity to a target-date fund could be a game changer.

"I would argue that a good target-date fund should be able to solve both accumulation and decumulation," said Nick Nefouse, BlackRock's head of retirement solutions.

Write to Neal Templin at neal.templin@barrons.com

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March 28, 2025 21:30 ET (01:30 GMT)

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