Nuts and Bolts: Target-Date Funds With Embedded Guaranteed Income

When plan advisers, sponsors and participants think about guaranteed retirement income, they often initially think of stand-alone third-party products such as annuities or managed account solutions. Increasingly, however, retirement income features are being incorporated directly into target-date funds, the investment vehicles already used by most defined contribution plan participants.

According to PLANSPONSOR’s 2026 DC Plan Benchmarking Survey, 88.4% of surveyed defined contribution plans offered target-date funds, and 6.4% offered retirement income products. PLANSPONSOR, like PLANADVISER, is owned by ISS STOXX.

As retirement income becomes a larger focus for plan sponsors, providers are looking for ways to add guaranteed lifetime income features to products participants already use.

“Target-date funds are the most popular way people save for retirement,” says Jason Kephart, senior principal of multi-asset strategy ratings at Morningstar. “The benefit of doing in-plan … gets you better pricing than you would on your own and better outcomes.”

Experts describe these products as target-date funds that include the option to annuitize all or a portion of retirement savings during retirement. Like traditional TDFs, they continue to follow a glide path that shifts asset allocation over time. The difference is that a portion of the fund may eventually be converted into a source of guaranteed income, depending on how the product is designed and whether the participant elects the feature.

Not All Guaranteed-Income TDFs Work the Same Way

While the concept sounds straightforward, one of the biggest challenges for advisers and sponsors is that TDFs that offer embedded income are far from identical.

“One of the challenges is [that] no two are really built exactly alike,” Kephart says. “Each one has its own benefits and tradeoffs.”

BlackRock’s LifePath Paycheck, launched in April 2024, illustrates one approach. According to Nick Nefouse, BlackRock’s global head of retirement solutions and head of LifePath, the product embeds guaranteed income directly into the target-date structure, rather than treating it as a separate retirement-income purchase.

“The way that we built our product is there’s no direct cost for the product,” Nefouse says. “LifePath Paycheck is not priced in a premium to LifePath Index.”

He notes that participants who elect the income feature place about 30% of their account into the insurance product.

“We built this as an asset class embedded in a target fund, and then when you get to retirement, if you choose, you can execute and take that income. If not, you just own an index target fund,” Nefouse says.

BlackRock intentionally removes from the participant the decision about how much of the portfolio should be allocated to the guaranteed-income sleeve.

“Just like we wouldn’t ask an investor what percent they wanted in international equities, we’re not going to ask the investor what percent they want in guaranteed income,” Nefouse says. “We’re going to build that into the portfolio with all of our modeling.”

Another TDF with embedded guaranteed income is set to launch in early 2027: Fidelity’s Freedom Lifetime collective investment trusts convert up to 25% of target-date-fund assets into a deferred income annuity.

“Fidelity’s target-date solutions have evolved to offer a range of active, index and blend strategies designed to help investors grow their retirement savings during their earning years,” wrote Molly Cunningham, Fidelity Investments’ head of workplace lifetime financial help, in an email to PLANADVISER.

Similar to BlackRock, Fidelity’s Freedom Lifetime CITs offer participants the option to purchase lifetime income within a portion of their TDF balances.

Addressing a Big Fear

The appeal of these target-date funds stems from a concern that many other guaranteed income solutions address: the possibility of outliving savings.

“One of the biggest fears people have is running out of money,” Kephart says. “This is kind of a way for the asset management industry to offer products that do provide some sort of benefit that says, ‘If you do this, you’ll at least get a certain amount of dollars back until you die.’”

At the same time, guaranteed-income features force some limitations on participants—flexibility, liquidity or potential growth opportunities.

Kephart says advisers should focus participant education on understanding exactly how a particular product works. These lessons become especially important as participants approach retirement and begin evaluating income projections. Because the guaranteed-income portion applies only to the assets designated within the structure, payout amounts may appear smaller than some participants expect, particularly if they have substantial retirement assets outside the target-date fund.

A New Normal for DC Plans?

Industry experts argue that embedding retirement income into target-date funds moves defined contribution plans closer to delivering a pension-like outcome. Many sponsors are attracted to the concept because it addresses what happens after participants accumulate savings.

“Their participants get to the point of retirement with a lump sum of money, and then they’re basically told, ‘Good luck,’” Nefouse says. “What we’re doing and what they like about it is it creates a level of certainty in retirement.”

Nefouse believes retirement-income features will become increasingly common within workplace retirement plans, though adoption will take time.

“The bulk of plans are going to move more to this personal pension approach,” he says. “That’s the direction of travel for 401(k) plans.”

Fidelity’s sees similar momentum.

“In recent years, we have seen meaningful innovation focused on in-plan retirement income solutions,” Cunningham said. “As sponsors develop a deeper understanding of these strategies, it is likely for adoption of retirement income solutions to increase.”

Still, Morningstar’s Kephart cautions that widespread adoption remains far from certain.

“I think we’re a long way from it ever being standard,” he says. “The education gap is very real, both at the plan sponsor level and then at the participant level.”