BlackRock's Annuity-Embedded Funds: A New Default for 401(k)s

BlackRock, the world's largest asset manager, has announced a significant shift in its 401(k) offerings. The company will now make funds embedded with annuities the default option for its retirement plans, a move that could reshape the retirement landscape. This change aligns with the broader trend of defined contribution (DC) plans replacing defined benefit (DB) plans, placing more responsibility on employees to manage their retirement savings.



The integration of annuities into 401(k) plans, as proposed by BlackRock's LifePath Paycheck program, has the potential to significantly enhance retirement income security for participants. Here's how:

1. Guaranteed Income for Life: The program offers participants the option to purchase fixed individual retirement annuities from insurers, providing a guaranteed stream of income for life. This ensures that participants won't outlive their savings, a major concern for many retirees (BlackRock, 2021).
2. Complementary Investment Options: The remaining retirement plan savings not used to purchase annuities can be invested in a target-date fund (TDF) designed to complement the lifetime income stream. This diversified portfolio, with an asset allocation of approximately 50% equities and 50% fixed income, provides participants with growth potential while mitigating risks (BlackRock, 2021).
3. Flexibility in Withdrawal and Investment: Participants can choose to withdraw a portion of their retirement plan savings at age 59.5 and purchase annuities, or they can direct the remaining savings to another investment option in their retirement plan or redeem it for cash. This flexibility allows participants to tailor their retirement income strategy to their individual needs and preferences (BlackRock, 2021).
4. Addressing Longevity Risk: By offering annuities, the program helps mitigate longevity risk, which is unpredictable and increases the likelihood of outliving one's savings. Annuities provide a solution to this challenge, as they ensure a steady income regardless of how long a person lives (BlackRock, 2021).
5. Increased Adoption: With the SECURE Act of 2019 protecting employers from being sued if an insurer fails to pay claims, more retirement plan sponsors may be inclined to offer annuities. This increased adoption could lead to a broader range of retirement income security options for participants (BlackRock, 2021).



In conclusion, BlackRock's decision to make annuity-embedded funds the default option for its 401(k) plans is a significant step towards enhancing retirement income security for participants. By providing guaranteed income for life, complementary investment options, flexibility in withdrawal and investment, addressing longevity risk, and increasing adoption among plan sponsors, this shift aligns with the broader trend of DC plans replacing DB plans and places more responsibility on employees to manage their retirement savings.