Workers and employers are becoming skeptical about deadline funds, TIAA says

Traditional target date funds (TDFs) are past their heyday as the preferred employer retirement plan for millions of American workers, according to a new study by TIAA.

The 2022 TIAA Retirement Insights Survey, conducted online in December and January, surveyed 1,008 retirement plan participants, ages 25 to 70, who reported working full-time at a company with 50 or more employees and who participated in either had employer 401(k) or 403(b) plans.

The survey also included 500 benefit plan decision makers who are full-time employees at a company with 50 or more employees and who offer employees enrollment in either a 401(k) or 403(b) plan.

Two-thirds of employers (66%) said they had begun to question whether TDFs were successfully recruiting employees after they stopped working. Employers also expressed concern that their employees are “not saving enough for retirement” (66% in 2022 vs. 58% in 2020). Almost three quarters of employers (72%) said they are very interested in a new generation of TDFs designed for lifetime income.

While three-quarters of workers (77%) say saving for retirement is their top priority, 51% said the pandemic has increased their anxiety about funding for retirement when they are ready. Just over half of respondents (54%) said they were very or extremely interested in Guaranteed Lifetime Income (GLI), compared to 51% in 2020, with 48% saying their interest in GLI increased during the pandemic have.

Despite workers’ increased interest in pension financing, only a third of employers (34%) currently offer GLI options and less than two fifths (38%) said they are familiar with the provisions of the SECURE Act, legislation, which would improve access to in-plan GLI.

The vast majority of employers (85%) familiar with and already offering scheduled GLI options said they are a valuable tool in ensuring adequate funds for employee retirement. Of those employers who do not currently offer GLI, 43% said they were very or very interested.

Among employees, cost is still perceived as a barrier by almost half (48%) of those surveyed. TIAA said employers need to emphasize the lower cost of GLI on plans versus off-plans to attract their employees to participate in them, particularly women, who the TIAA says typically retire earlier than men and have about 30% less retirement savings to have. When study participants were asked if they would be interested in investing in a GLI annuity if it was offered through their company’s retirement plan at a lower cost, 73% answered yes.

According to TIAA, less than half of plans (41%) offer auto-enrollment or auto-escalation. Another element plan sponsors can consider is income projections, which most employees surveyed (72%) found helpful in funding their retirement.

“Employers are beginning to recognize several critical shortcomings of traditional term funds and are now seeking annuities that protect their employees’ savings and provide guaranteed monthly income options for life,” said Colbert Narcisse, TIAA’s chief product and business development officer in a press release . “Plan sponsors can better serve participants by offering new customized goal date solutions that offer greater personalization and include access to guaranteed income in retirement that cannot be survived. These solutions can also help mitigate portfolio volatility in a rising interest rate environment.”

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