Building the target date of tomorrow

A conversation between Saira Malik, CFA, Head of Nuveen Equities and Fixed Income, Chief Investment Officer, Brendan McCarthy, Head of Nuveen Retirement Investing, and John Cunniff, CFA, Head of Target Date Multi-Asset Portfolio Management

Q: Saira

As we continue to have more conversations with clients about their changing investment menus — Brendan, how do you see the current status quo? What are they currently working toward?

A: Brendan

In terms of investment menus, plan sponsors are always looking to simplify the plan menu and make it as easy as possible for participants to understand their investment options. Firstly, that generally means a ‘do it for me’ option, usually a target date, secondly, an investment option for those who want to self-select, and third, an advisory offering for those who want to take advantage of a managed account service. We are not seeing a lot of growth in self-directed brokerage windows, which was big for a while. The focus is just trying to minimize and simplify the menu.

The biggest change to investment menus now seems to be how and where to incorporate lifetime income. We are starting to see the first large plan sponsors implement these solutions into their 401(k) offerings. We’ve been talking to plan sponsors about the why — why they should consider adding lifetime income into the investment menu. They are now moving to the how. They’ve seen a lot of different products come to market and they need help to evaluate, select and implement one of these solutions into the plan. A lot of them are going to their consultants for guidance, but a lot of them are reaching out to leading product manufacturers.

Q: Saira

John, as target dates continue to evolve, how have you thought about your allocations, changing risks, and more recently with this lifetime income conversation beginning, how does that impact how you think about target dates?

A: John

Going back to 2006 when I joined the firm, lifecycle funds had just started, and we sat down with our actuaries to talk about longevity risk. We had all the experience of various market risks, whether stock or bond market, but we wanted to analyze how long individuals live to incorporate their needs into the design of our original lifecycle series without the annuity. It was obvious we needed a ‘through retirement’ path versus just ‘to retirement’. People are living longer, and ‘to retirement’ solutions were too short-sighted — there’s often 20 – 30 years of wonderful retirement after that. Today, about two-thirds of our target date competitors have a ‘through retirement’ path. We extended our glidepaths when we noticed individuals staying invested in their target dates longer through retirement.

In terms of asset classes, Nuveen has deep expertise in traditional asset classes, equities, fixed income, alternatives and commercial real estate. And that provides a tremendous degree of diversification and independence relative to the stock and bond market. We are also one of the few asset managers to offer index, blend and active series target dates. In terms of adding the annuity to our other capabilities, which we believe are the best Nuveen has to offer and the 100+ year history of TIAA, we built the Nuveen Lifecycle Income CIT Series. We’re leveraging that annuity through the TIAA Secure Income Account, which gives the option for guaranteed¹ income but may even provide an equal if not better risk adjusted return profile than other fixed income asset classes for individuals who choose not to annuitize. Our goal is to bring the best of the firm forward and provide that in a solution for participants and firms.

Q: Saira

From an asset class analysis perspective, when it comes to the addition of the annuity — is that the same process you went through with real estate? How did you approach and think about that?

A: John

We have a scoring system and process for analyzing different glidepaths. We’re focused on the retirement outcome, balancing market risk and portfolio characteristics, and looking at that glidepath from a decumulation angle — how many assets does the participant have, and how much income can they generate. So, we went through a whole structure process of when to add an annuity, how much we could add at certain points, and the most we could own of the annuity. We found that growing the allocation in our glidepath to 40% at retirement gave, what we believe, the best improvement to retirement income, while giving those individuals the option to annuitize at retirement.

Q: Saira

Brendan, how are you approaching this with clients? Is there an education or knowledge gap?

A: Brendan

There are a couple of things we say to plan sponsors right out the gate — anything to work inside a 401(k) plan today, it probably needs to be inside of a target date. The majority of employees are going to get auto-enrolled into a target date fund and they are going to leave their money there.² The second thing we talk about is how the annuity works inside the target date fund, using three guiding principles for the inclusion of the annuity.

The first is that target date funds work. People like them, so change them as little as possible.

The second thing is making the annuity option available to all. There shouldn’t be restrictions around the annuity option — it should be open to all who are in the target date fund. Some lifetime income products coming out aren’t available to everybody – for example, they may have an age cutoff at 65 or 70 years old.

The third thing we want is the target date to be designed for the broadest population possible. Not everyone is going to use the option, but for those who are not going to annuitize, is the target date alone good enough? Are you using a target date that will get those participants to the same place or better? To John’s point, we look at this like any other asset class; the asset mix should improve returns and decrease volatility. At the end of the day, in more scenarios than not, we think participants are going to be in a better place even if they don’t annuitize.

Q: Saira

What impact does this have on fees? Is there an advantage to doing this as an embedded option?

A: Brendan

I think one of the key things to make plan sponsors aware of is this is not a retail annuity — these are institutional annuities that are designed specifically for the 401(k) plan. The plan sponsors are getting that scale for their employees and getting the best price available for their annuity. In fact, a target date series that invests a portion of the portfolio to a deferred fixed annuity can result in lower fees for the overall product when compared to standard target date series that doesn’t invest in the annuity.

They also fall under the umbrella of going inside an ERISA plan, so you get higher level fiduciary oversight. It’s important to educate plan sponsors on these differences as much as their employees.

Q: Saira

So with 100 years of history behind us doing this, what does the future hold?

A: John

The growth of annuities in a packaged target date and making that available in a QDIA is a great service. Here, we’re giving people the option to annuitize giving them as much flexibility as possible relative to other participants. We always have ongoing research work into our glidepath in hopes of leveraging the best across our equity, fixed income, and alternatives. We’ve done a tremendous amount of work recently with alternatives and we’re going to keep looking at those options.

When we’re talking to advisors or plan sponsors, there’s a shift in the overall feeling about these types of products. Go back 5-10 years, there were annuity products out there, but they never really took off. Over the next 3-5 years we’re going to see more availability, and it’s very important that these are built to be portable and available for all. The demand for these products is rising, and I can see a large portion of the QDIA moving from a standard target date to a product request. If you can replicate that and do no harm, while providing the product for a similar or lower fee with an option for lifetime income, that’s a very attractive offering.

A: Brendan

The biggest thing right now really is infrastructure to support this shift. That process has started but it’s going to take a little bit. Congress changed policy to make it easier and encourage use of annuities inside 401(k) plans, but record keepers did not have the capability to add third-party annuities to their systems. It was much more complex, and they weren’t designed to hold those types of instruments. But we are seeing record keepers build the technology so they can offer these third-party annuities. In 2024, we saw the two largest defined contribution U.S. record keepers — Fidelity and Empower³ — announce plans to start offering these solutions on their record keeping system. In 2025 we’ve seen Principal, the seventh³ largest record keeper, make an announcement as well. The second is plan sponsors being educated and starting to head down this path with their consultants. Consultants are starting to embrace these and rate them while firms like us help — not just with the build but education, understanding, participant experience, and even retirement income certification programs.