Target-date funds have become a staple qualified default investment alternative (QDIA) because they help participants invest appropriately without requiring them to act. But as retirement nears, income needs become more pressing and financial situations diverge—a situation dynamic defaults seek to address. We think guaranteed income solutions should be the next dynamic default evolution.
Default Solutions in DC Plans Have Been Effective—But Can Do More
There’s a reason that target-date funds have earned a place as the dominant QDIA in DC plans: they solve a tough investment challenge in a simple and efficient way. Most participants aren’t investment professionals and don’t want to be. With target-date funds, professional investors manage the portfolio over time—even for unengaged participants.
See more: Debunking Four Myths About Guaranteed Income Solutions
But while target-date funds remain highly effective in the accumulation years, all participants eventually face a fundamentally different challenge. Their financial situations become more individualized and they need to convert their hard-earned savings into a reliable income stream that lasts a lifetime. One way DC plans have addressed this challenge is by offering a dynamic default that transitions from a target-date fund to a managed account at a specified age. But we think more can be done to bolster retirement income.
Including Guaranteed Income May Improve Outcomes
Managed accounts certainly add value, especially for participants who are actively engaged with the retirement planning process. Using participant-specific information, they provide personalization, asset allocation, income planning and withdrawal or “managed income” guidance.
But many participants don’t engage with their QDIAs or provide information consistently, if at all. In these cases, managed accounts can struggle to distinguish each participant’s financial situations and needs. The accounts may end up being not much different from an age-based investment allocation, potentially with more complexity and higher costs.
We believe that a default’s objective is more about improving outcomes for participants, including those who don’t engage, and less about personalization. From our perspective, an important way to enhance a default is to help participants address income security with guaranteed lifetime income. Income becomes a new tool in the default—not simply another allocation layer.
Target-date funds don’t offer this pathway by themselves, so incorporating a guaranteed income component creates a dynamic default that helps solve for a challenge more participants struggle to wrap their minds around. For example, nearly half of participants think they can withdraw an unrealistic 10% or more annually for life without running out of money, based on AB’s 2026 Inside the Minds of Plan Participants survey.
Plan sponsors recognize the income need, too. At our recent DC Symposium attended by plan sponsors and consultants, 89% said a QDIA should focus on both accumulation and income. Among respondents, 78% believed in at least some income personalization and 78% (Display) also preferred an embedded income solution with a guarantee versus a non-guaranteed solution with payout recommendations.
A Dynamic Default with Guaranteed Income
While target-date funds use age to adjust asset allocations over time, they lack an explicit income solution. But a target-date fund that transitions to a combination of the fund and a liquid, revocable guaranteed income allocation is a dynamic default all its own.
It provides a target-date strategy with guaranteed lifetime income that adjusts the income exposure based on plan-level information on participants. These data points can identify and help customize among employee groups, including compensation levels or those who have a defined benefit pension or are covered by Social Security. With this information, income protection can be tailored without requiring participants to actively engage.
We think this dynamic-default solution features many of the advantages that made target-date funds successful. For instance, it remains scalable, easy to implement and continues to work for participants who may never act on their own. Moreover, participants who want more customization can personalize the income solution or pursue a managed account or other planning solution.
The Big Picture
As retirement draws closer, participants’ needs increasingly focus on securing income for life. In our view, a dynamic default with a target-date fund that incorporates customizable guaranteed income can be an effective solution for DC plans. And it keeps design simple, efficient and participant-friendly.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
“Target date” in a fund’s name refers to the approximate year when a plan participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as a participant nears retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested—including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.
The guaranteed lifetime withdrawal benefit (GLWB) is a type of annuity that sets a withdrawal amount that will last throughout a participant’s retirement, even if the market falls or the account’s assets run out. The insurers will continue the withdrawal payments, if needed. Guarantees are based on the financial strength and claims-paying ability of each insurance company.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.
© AllianceBernstein
Read more commentaries by AllianceBernstein
