Annuitization, Maybe, Annuities In The Traditional Sense, Not So Much

Over the last few months we've taken a couple of looks at the Stone Ridge Life Cycle suite of mutual funds. The quick and dirty on them is that they annuitize fund assets when holders turn 80 years old. They are issued for each year so if you were born in 1959, you buy the fund for that birth year and then at 80, you're locked in. The funds pay out like an annuity and then at age 100, the remaining assets are split among fundholders who are still alive. 

The expense is nothing like regular annuities, I've described these funds as merely not cheap. Allan Roth thinks the product details are well worth the expense if you want to read his take. There's a growing sentiment that part of the solution for our lack of preparedness for retirement is to annuitize more asset to harness the benefit of longevity pooling and the opportunity for a payout that it noticeably larger than 4%. Of course the families of people who die young lose out on that aspect. Please note that annuitizing assets is not the same as buying annuities. The Stone Ridge funds are an evolutionary step in figuring this out. I've said before they are intriguing but I don't know if they are a final solution. I'm glad that companies are trying to innovate in this space. 

Annuitization, maybe. Annuities in the traditional sense, not so much. Hopefully, I'm clear on this point. 

The Wall Street Journal reported on a product that is in this same neighborhood from Blackrock which is a client holding. Between the article and Blackrock's webpage for what it is calling LifePath Paycheck target date strategies, there are some details not easily found so take this as a first investigation on what the product is. 

At a very high level, picture a target date fund with an allocation to equities, fixed income and some sort of annuity product. If it was a target date fund of funds and one of the funds was one something like Stone Ridge's Life Cycle then I'd probably think this was a good, incremental step forward to whatever the workable solution will end up being. 

Keeping in mind that the vast majority of 401k participants do not engage anywhere near the level that you, reading an investment blog does. While I believe target date funds to be woefully inferior, they can get the job done. So from that context, annuitizing part of a 401k with something structured like one of the Stone Ridge funds doesn't seem that bad to me. 

That's not what Blackrock appears to be doing. As best as I can tell, Blackrock customers have access to buy an annuity through their LifePath fund. Buy an annuity might be cringe, but maybe not, it does say "no commissions, loads, distribution fees or surrender charges." I don't know if this is a good deal or not but we all know to be skeptical and yes I am skeptical. It is still early innings in the evolution of products that annuitize retirement assets (reminder I am making a distinction between annuitize and annuities). 

I will continue to say to let this niche evolve and keep tabs on what happens. If I understand the Blackrock product, big if, then I'd say the end user implementing the corresponding Stone Ridge in with their other asset classes for themselves would be better than having it lumped in for you by a financial services company.

That Blackrock is making an effort in this space, aside from thinking it can be lucrative, validates that something needs to happen with annuitizing retirement assets in a manner that differs from annuities as most people know them. If Vanguard and Schwab try to jump in then that would be more validation and might bring in Fidelity which tends to be good at this sort of thing even if their track record for being first to market is spotty. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.