What Is an Annuity Target Date Fund?

An Annuity Target Date Fund (ATDF) is a modern investment option that blends the simplicity of a traditional target date fund with the security of an annuity. It’s designed to help employees grow their retirement savings and convert them into guaranteed income—all within a single investment.

As lifetime income becomes a policy focus under federal retirement law, these funds are gaining traction, supported by recent legislation such as the SECURE 2.0 Act of 2022 and related Department of Labor (DOL) guidance.

1. How Target Date Funds Work

A traditional Target Date Fund (TDF) is an age-based investment that automatically adjusts over time. When an employee is decades from retirement, the fund invests heavily in stocks to encourage growth. As the target retirement year approaches, it gradually shifts toward bonds and other conservative investments to preserve capital [1].

This “glidepath” design simplifies the process for participants who want a diversified, professionally managed portfolio without having to rebalance or pick funds themselves.

2. Adding the Annuity Component

The Annuity Target Date Fund builds on that structure by including an embedded insurance feature—the annuity. As employees invest, the fund allocates a portion of their assets to secure future lifetime income. Upon retirement, the participant can elect to convert all or part of their balance into guaranteed monthly payments that last for life [2].

This design effectively combines accumulation and decumulation within the same vehicle—helping to solve one of retirement’s hardest problems: outliving your savings.

“An annuity inside a target date fund is like building the parachute before you jump—it’s there when you need it most.” [3]

3. The Policy Shift Toward Lifetime Income

For decades, defined contribution plans (like 401(k)s) have replaced traditional pensions without offering a clear way to create predictable income. Policymakers recognized this gap and responded with the SECURE Act of 2019 and later, SECURE 2.0 Act of 2022, both of which encourage lifetime income options inside employer-sponsored plans [4].

Among the key SECURE 2.0 provisions:

• Enhanced lifetime income disclosure requirements, helping participants visualize retirement income potential.

• Portability of lifetime income investments, allowing participants to preserve annuity contracts when plans change recordkeepers.

• Greater flexibility for plan sponsors to include in-plan annuities and related products, such as ATDFs, without fear of fiduciary liability for insurer insolvency if due diligence is properly documented.

These changes reflect a fundamental policy goal: making lifetime income the default, not the exception.

4. Fiduciary Implications for Plan Sponsors

From a fiduciary standpoint, offering an Annuity Target Date Fund introduces dual oversight responsibilities—for both the investment and insurance components. The DOL’s 2019 Safe Harbor for Selecting an Annuity Provider remains the cornerstone for evaluating these products [5]. It directs fiduciaries to:

• Assess the financial health of the insurer,

• Evaluate fees and guarantees for reasonableness, and

• Document the process used to make and monitor selections.

Under SECURE 2.0, the DOL and Treasury continue to develop clarifying guidance and model disclosures for lifetime income options [6]. Plan sponsors should monitor updates from the DOL’s Employee Benefits Security Administration (EBSA), which has already signaled that additional rulemaking on fiduciary governance and income disclosures is forthcoming [7].

In fiduciary terms, prudence isn’t perfection—it’s process. Employers that can demonstrate thoughtful, well-documented decisions are better protected.

5. Benefits of Annuity Target Date Funds

• Built-in diversification and age-based management: The TDF component automatically adjusts the asset mix over time.

• Predictable income for life: The annuity feature helps retirees create a sustainable income stream.

• Behavioral simplicity: By embedding annuitization, the fund helps overcome participants’ hesitation to purchase lifetime income products on their own.

• Alignment with federal policy: SECURE 2.0 explicitly encourages lifetime income features, giving fiduciaries a clearer legal framework to operate in [4][6].

6. Potential Drawbacks and Considerations

While promising, ATDFs aren’t perfect:

• Higher fees due to insurance costs and income guarantees.

• Complexity—participants may struggle to understand payout terms or insurer credit risks.

• Portability challenges if recordkeepers or plan sponsors change.

• Dependence on insurer strength, which makes due diligence critical.

Still, these challenges are manageable within a sound fiduciary process—especially one aligned with the ERISA best practices now expected under the DOL’s evolving standards.

7. The Road Ahead

As the DOL and Treasury continue implementing SECURE 2.0 provisions through 2025, the landscape for lifetime income in defined contribution plans is rapidly maturing. Many major investment providers—such as BlackRock, TIAA, and Fidelity—have already launched or expanded ATDF offerings [2][8].

For employers, adopting an ATDF can demonstrate proactive fiduciary management—balancing plan innovation with participant protection. For employees, it’s a path toward financial security that doesn’t end at retirement.

In the words of one industry executive, “Retirement success isn’t just about reaching a number—it’s about knowing the paycheck won’t stop.”

References:

[1] Vanguard. (2024). How target-date funds work. Retrieved from https://investor.vanguard.com/mutual-funds/target-retirement/#how-it-works

[2] BlackRock. (2023). LifePath Paycheck: A target date fund with lifetime income. Retrieved from https://www.blackrock.com/retirement/lifepath-paycheck

[3] Financial Planning Association. (2023). The next evolution of target date funds: Adding guaranteed income. Retrieved from https://www.financialplanningassociation.org

[4] U.S. Congress. (2022). SECURE 2.0 Act of 2022, Division T of the Consolidated Appropriations Act, 2023, Pub. L. No. 117-328. Retrieved from https://www.congress.gov/bill/117th-congress/house-bill/2617

[5] U.S. Department of Labor. (2019). Final rule: Selecting an annuity provider for a defined contribution plan safe harbor. Retrieved from https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2019-01

[6] U.S. Department of Labor. (2023). SECURE 2.0 Act of 2022 summary page. Retrieved from https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/secure-2-0-act-of-2022

[7] U.S. Department of the Treasury & Internal Revenue Service. (2024). Proposed regulations on new automatic-enrollment requirement for 401(k) and 403(b) plans. Retrieved from https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-new-automatic-enrollment-requirement-for-401k-and-403b-plans

[8] Investment Company Institute. (2024). The evolution of lifetime income options in defined contribution plans. Retrieved from https://www.ici.org/research