Are registered index-linked annuities a more suitable choice than target-date funds as default retirement plan investments?
Despite legislation over the past 20 years designed to enhance retirement security, many Americans continue to be financially underprepared for retirement. Automatic enrollment in employer-sponsored retirement plans has helped, but the target-date funds commonly used as default investments can introduce their own problems. The authors of this study propose a target-date version of registered index-linked annuities and suggest that these “TD-RILAs,” compared to target-date funds, provide a more cost-effective and transparent way to attain diversified equity exposure that decreases over time.
- Target-date funds, compared to TD-RILAs, achieve a preferable distribution of outcomes at equal cost, but practical considerations can give TD-RILAs an advantage in helping employees prepare for retirement.
- Making fees and other investment characteristics explicit has a material impact on investment choice, as does whether the investment is the default choice.
- TD-RILAs can be a suitable addition to qualified retirement plans and have the potential to rival target-date funds as default investments, particularly if offered at the low cost of standard index-linked annuity products.