Twenty three years ago Target Date Funds (TDFs) were created as a one-stop solution for retirement planning. The story behind TDFs is one of simplicity: Pick the date you will retire and professionals will manage your money with an eye towards that date; the story has been well received. TDFs, like Schwab target date funds for example, are also perceived to be lower risk than regular securities. Consumers didn’t buy TDFs because they expected great performance, but with the expectation that the TDF would help protect them against losses.
Fifteen years ago the variable annuity industry introduced a withdrawal benefit that guaranteed a lifetime income and the first GLWB was born. Three years later fixed index annuities began offering GLWBs and soon after GLWBs appeared as riders on a few fixed rate annuities as well. Both TDFs and GLWBs became big hits with consumers. The main reason was simplicity; once you bought the fund or GLWB you didn’t have to mess with it.
To and Through
The TDF can be managed “to” the target (retirement) date or “through” the target date. The “to” side is based on the belief that the TDF will be liquidated on or around the target date, with the proceeds placed someplace else – such as a retirement income fund – where the money is managed to cope with the systematic withdrawals the retiree will be taking. The “through” TDFs operate under the premise that it will be retained and the retiree will begin taking systematic withdrawals starting around the target date. The GLWB more directly compares to the through TDF because they both are designed to produce retirement income directly while allowing the retiree to maintain control over both the income and access to account value. After a consumer purchases an annuity with a GLWB or a through TDF they could sit back and simply wait to turn on the income spout.
Snowflakes
Individual TDFs and GLWBs are pretty much unique unto themselves. Although the all encompassing theme is there, the individual products, strategies and specifications can be wildly different. Today the typical TDF invests in 17 funds that often include a variety of domestic and international equities, emerging markets funds, commodities and real estate. Along the same individualistic path, variable annuity GLWB specifications differ from each other and often strongly differ from fixed index annuity GLWBs, which also may differ broadly from one another. One needs to pick a TDF that matches their retirement goal and risk philosophy, while the proper GLWB is one where the growth and payout works well for the consumer’s projected income start date.
Similarities and Differences
Both TDFs and GLWBs
- Were specifically designed as retirement solutions.
- Are simple concepts where one can buy it and leave it alone until retirement.
- Are perceived as lower risk than traditional investing.
- Give the retiree control and access to the account.
- Only GLWBs
- Guarantee a minimum growth of future income.
- Guarantee a minimum retirement income.
- Guarantee the retirement income will last a lifetime.
- The income guarantees are backed by the full faith and credit of the insurer.
- Some GLWBs enable you to calculate to the penny the income you will receive at retirement.
Target Date Funds are gaining a big chunk of the retirement fund market because they are a retirement solution the consumer doesn’t have to mess with that they feel provides better protection from market loss. Applying an annuity GLWB concept hits the same higher behavioral buttons as a TDF, but also has guarantees.
