(Eminetra) - The investment giant said five employers have signed up for a new retirement product that will allow workers to receive a stream of payments for the rest of their lives.
A small number of 401(k) plans currently incorporate annuities. Employers who offer retirement plans worry about annuities’ complexity and their cost—and about being sued if the insurer that stands behind the annuity fails to make payments. A 2019 law now protects many employers from legal liability.
BlackRock’s offering is one of the first from a major asset manager since the law passed. Workers at electric utility Tennessee Valley Authority, car parts provider and three other companies will have the new annuity product as the default option in their employee retiree plans. That means collectively around 100,000 U.S. employees with some $7.5 billion in workplace savings stand to eventually get annuities in 401(k)-type plans.
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The insurance industry has long promoted annuities as important retirement vehicles; a saver who accumulated stocks and bonds could outlive her assets, but an annuity keeps paying until death. One problem that remains is cost: Since interest rates are very low, annuity buyers have to turn over a lot of cash up front for a relatively small payment, and fees can add up.
BlackRock, which has $9.5 trillion in assets, isn’t an insurance company; the annuities in its plan will be issued initially by insurers Brighthouse Financial Inc. and Equitable Holdings Inc.
BlackRock says it aims to use its clout to negotiate cheaper group rates.
“We’re sitting between the end-individual and insurance companies, using our aggregation power to face off against the insurance company,” said Mark McCombe, BlackRock’s chief client officer.
The annuities will be part of a new series of BlackRock target-date fund offerings. Target-date funds are the default way many Americans save for retirement; U.S. target-date mutual fund assets totaled $1.78 trillion in August, according to Morningstar.
Like other target-date funds, BlackRock’s new product will switch from a more stock-heavy to bond-heavy mix as individuals age. It will also invest over time in a pool of annuity contracts. In addition, savers can also use 30% of their 401(k) balance to purchase their own fixed annuity. They can make this choice between the ages of 59 and 72.
The new series of target-date funds, when offered through institutional accounts, will cost an employee roughly 0.1%, or $10 for every $10,000 managed. When the product starts to invest in group annuity contracts, the person’s fees would rise but be capped at 0.16%, according to BlackRock.
Fixed annuities traditionally charge around 1% of the account value. The average expense ratio for target-date mutual funds is 0.34%, according to Morningstar.
BlackRock, which manages more than $350 billion in target-date assets, says it hopes to create mutual fund versions of the annuity offering in the future. Rival Vanguard Group, a major target-date fund provider, hasn’t put annuities into such funds.
“We do not believe in adding a ‘one-size-fits-all’ annuity allocation,” the world’s No. 2 asset manager said late 2020.
