Is Guaranteed Income the Next Frontier for Target-Date Funds?
The SECURE Act opens the door for annuities in target-date funds.
Morningstar's 2020 Target-Date Strategy Landscape covers the current trends driving target-date funds, but the freshly passed SECURE Act could have a big impact on the future of these retirement savings vehicles.
In December 2019, Congress passed the SECURE Act, a retirement readiness bill that included new rules to make annuities more accessible for defined-contribution plans. Previously, plan sponsors assumed liability for all the typical investment risks that come with a security--such as costs, process, and execution--but for annuities, they also bore responsibility for the unique hazard of the insurer defaulting on the contract. Given the long time horizon attached to annuities, plan sponsors were not willing to take on that risk. Under the SECURE act, employers are now mostly shielded from that liability if the insurer defaults, as long as that insurer meets creditworthiness requirements at the time the decision is made.