Vanguard recently released a new line of target-date funds: the Vanguard Target Retirement Lifetime Income funds. The new series of funds will only be available in employer-sponsored defined contribution plans (e.g., 401(k), 403(b), etc.).
What’s different about them, relative to the existing Vanguard Target Retirement Funds, is that beginning at age 55, they’ll begin allocating a portion of the portfolio to the TIAA Secure Income Account, a deferred annuity. And that deferred annuity can later be “annuitized” (i.e., exchanging the balance for a lifetime income stream like a pension).
There’s nothing new about the ability to annuitize some or all of the balance of an employer-sponsored plan. It’s long been possible to roll a 401(k), or a portion of such, into an individual retirement annuity (a.k.a. IRA annuity). But:
- Most people don’t know that’s an option.
- And even if you know it’s an option and might be interested, it’s still a hassle.
And most of the people who use target-date funds are those who either a) may be somewhat less informed than others or b) simply want a low-hassle option. In other words, among this group of people, the number who would buy such an annuity on their own is probably vanishingly small, even if such a product would actually be very appealing to them.
So it will be interesting to see: when people are given a much more accessible option to annuitize their savings, how many of them take that option?
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