Target-Date Funds with Annuities: Smart Innovation or Added Risk?

What was once a niche concept is growing in popularity. Multi-asset portfolios with annuities have grown rapidly over the past few years, and broader in-plan annuity solutions now account for well over $100 billion. 

Just as important as the growth itself is who’s driving it. Established players like BlackRock have already built significant scale, and Vanguard’s recent entry into the space signals that this isn’t a passing trend, it’s a structural evolution in how retirement solutions are being designed. 

Regulation is evolving alongside it. The Department of Labor’s recently proposed rule, which outlines a fiduciary process for selecting alternative investments in defined-contribution plans, explicitly includes lifetime income within its framework. 

For advisors and plan sponsors, this moment feels familiar: early-stage adoption, increasing competition, and a growing need to separate innovation from lasting value.

At their core, these products are trying to address one of retirement’s most persistent challenges: how to turn accumulated savings into a reliable income stream in retirement. 

Many participants are comfortable saving through a target-date fund, but far less confident when it comes to spending in retirement. The fear of outliving assets remains a major concern, especially as life expectancies stretch into the 80s and beyond. 

Embedding annuities inside target-date funds attempts to close that gap. Instead of requiring participants to leave their plan and navigate the retail annuity market, these strategies aim to deliver steady, paycheck-like income directly within a familiar investment structure. 

While the DOL’s investment selection proposal specifically targets Employee Retirement Income Security Act of 1974-regulated 401(k) plans, non-ERISA plans, like 403(b)s, have long served as a proving ground for in-plan annuities. 

When combined with emerging target-dates with annuities, total assets in multi-asset portfolios with embedded annuities now exceed $117 billion, a big jump from just $45 billion two years ago. This growth suggests that, as regulatory clarity improves for ERISA plans, there may be more demand for target-dates with annuities. 

Target-dates with annuities are still a small drop in the ocean of target-date assets, but there are signs that more plans are adopting these strategies and reasons to believe the growth will accelerate. Assets in target-dates with annuities totaled $44 billion across 13 target-date series at the end of March, up almost 70% from the same time last year. 

BlackRock LifePath® Paycheck has driven most of the growth, reaching over $25 billion since launching in 2024. The series serves as a high-profile example of an integrated approach: It uses the research and glide path of BlackRock’s traditional target-date offering, but it incorporates an annuity component as participants approach retirement. At retirement, participants can opt into the annuity and begin receiving payments, or they can choose to stay the course and have a similar experience as someone in a traditional target-date strategy. 

We expect a significant portion of early plan adoption to be plan sponsors transitioning from the traditional series to an annuity-embedded version from the same provider, building on their existing comfort with a manager’s asset allocation and glide path philosophy rather than underwriting a new series. While structures vary, ranging from deferred-income annuities to guaranteed withdrawal benefits, the entry of massive incumbents like Vanguard, JPMorgan, and Principal suggests that the market for these strategies is poised for a substantial expansion. 

BlackRock, Vanguard, and Nuveen each offer income annuities, though they take different paths to get there. Opting in means surrendering that portion of savings to an insurance company in exchange for guaranteed payments that last for life. 

The appeal to these products is straightforward: Income starts immediately, bringing structure and predictability to retirement spending. And because retirees may not need to lean as heavily on portfolio withdrawals during market downturns, an income annuity can meaningfully reduce sequencing risk, one of the more underappreciated threats to a retirement portfolio in its early years. 

But that guarantee comes with real trade-offs. The most immediate is liquidity: Once the money is handed over to the insurance company, it's gone and unavailable for emergencies, large expenses, or heirs. Then there's inflation. The payments are fixed, and even a modest 2% annual inflation rate quietly erodes purchasing power over time. Finally, there's no explicit fee. Instead, the cost is embedded in the payout rate itself, which makes it difficult to know whether you're getting a good deal.

The other popular approach addresses the liquidity problem head-on. GLWBs, like those offered by the JPMorgan and AllianceBernstein series, let participants keep control of their savings while still offering protection against the risk of outliving them. Rather than handing over a lump sum, participants stay invested and are guaranteed the ability to withdraw a set percentage of their savings each year for life, even if the account is eventually drawn down to zero. 

The appeal is flexibility. The money remains accessible, which addresses the liquidity concern that makes immediate income annuities a harder sell for some. 

But flexibility comes at a cost, and unlike income annuities, this one can show up as an explicit fee, typically around 1% per year. That fee is charged regardless of whether the participant ever uses the guaranteed income, meaning those who need to withdraw all their money early have paid for something they didn't need.  

And flexibility has limits: If a participant withdraws more than the guaranteed amount in any year, the guaranteed income floor can be permanently reduced going forward, which can catch retirees off guard during years when unexpected expenses arise. 

Regardless of the general type of annuity, both could help improve retirement spending in the right scenarios. But they aren’t one-size-fits-all. Participant needs vary widely, making selection challenging. 

That makes rigorous evaluation even more important. The DOL has identified six factors a fiduciary should consider when evaluating investment options for a 401(k) plan: 

One approach the DOL suggests is a breakeven analysis: How long would a participant need to live for the insurance benefit to justify the additional cost? It's a reasonable framework but a complex one that most plan sponsors are not equipped to run independently. 

For income annuities, a more tractable approach is to compare the rates offered to participants against market rates for similar products. Given the potential scale of these target-date funds, group pricing should translate into meaningfully better-than-average rates. Even if that data is provided by the manager, it offers a more reliable signal than breakeven analysis, where small changes in assumptions can produce significantly different conclusions. 

A misunderstood product is a misused or unused product. If participants disengage, the added complexity and potentially higher fees deliver little value at a higher price. Worse, participants who only partially understand these products may misuse them in ways that produce poor retirement outcomes. 

That's why clear, accessible participant education is a must-have. Plan sponsors should expect providers to show up with the basics: plain-language disclosures, retirement-income calculators, and guidance that helps participants understand what they're getting and why it matters. Providers that can't demonstrate these fundamentals should be crossed off the list.

Evaluating these products’ performance requires accepting upfront that forecasting is hard. Instead of relying on a single forecast, plan sponsors should evaluate how guaranteed withdrawal or payout rates perform across a range of interest rate and stock market environments. Comparing providers under the same assumptions is often more informative than trying to predict absolute outcomes because it makes differences in pricing and payouts easier to identify. 

For guaranteed lifetime withdrawal benefits, it’s also useful to examine how providers have adjusted withdrawal rates over time. That can offer insight into how stable and dependable those guarantees have been. 

Most target-date series with annuities have a sibling series built on the same glide path, asset allocation, and underlying investments. That sibling series provides a natural benchmark because it is fully liquid and investable and shows how the strategy would have performed without the guarantee. If a meaningful performance gap emerges as participants approach retirement, it’s worth examining whether the annuity’s cost is creating more drag than expected. 

Participants receiving guaranteed income through a GLWB or income annuity are benefiting from something traditional performance comparisons do not capture. This is where the DOL’s emphasis on meaningful benchmarks becomes especially challenging for these products and where plan sponsors may need to rely more heavily on scenario analysis than peer comparisons. The key question becomes how well the product delivered on its income promise across different market environments. That is ultimately the performance measure that matters most in retirement, even if it is the hardest one to evaluate cleanly. 

For participants, the target-date fund itself remains fully liquid unless they elect to convert a portion of their balance into an income annuity. At that point, those assets become irrevocable, exchanging liquidity for a guaranteed income stream. Products that use a GLWB structure avoid this trade-off entirely, preserving full liquidity while still providing an income guarantee. 

Liquidity at the plan level is a different matter. Target-date funds that incorporate stable value to support the lifetime income guarantee may require up to 12 months' notice to unwind. Plan sponsors considering a provider change or menu restructuring should factor that runway into their timeline. 

Valuation takes on a different dimension with these products. The daily NAV reflects what a participant's account is actually worth. But GLWB structures also maintain a separate benefit base, which works like a high-water mark: It locks in at the account’s highest value and doesn't fall with markets. It's that benefit base, not the account value, that determines what a participant's guaranteed income will be. The two numbers can diverge significantly after a market downturn, and a participant who only looks at their account value may underestimate what their income guarantee is worth. 

For products that offer annuitization, the conversion rate that translates account value into monthly income is set by the insurer and can change, introducing a form of pricing uncertainty that sits outside the standard NAV framework. These aren't reasons for concern so much as reminders that daily NAV, while necessary, doesn't tell the whole valuation story. 

Growing adoption, Vanguard’s entry into the market, and a more supportive regulatory backdrop all suggest this category is becoming too important to ignore. But greater adoption should come with greater scrutiny. These products introduce risks and trade-offs that traditional target-date fund due diligence was not built to evaluate, including insurer credit risk, liquidity limitations, complex benefit structures, and the challenge of measuring retirement-income outcomes. 

The DOL’s six-factor framework provides a strong starting point, but plan sponsors and consultants will likely need to apply a broader and more detailed review process. Fortunately, that process is manageable, though not necessarily easy. For participants, the goal is straightforward: dependable income that lasts through retirement. Ultimately, that is the standard these products should be judged against.