Vanguard to Add Regular Income Stream to Investors’ Go-To Retirement Funds

Vanguard is one of the U.S.’s top providers of target-date funds. (Hannah Beier/Bloomberg)

Key Points

• Vanguard is developing target-date series for employer-sponsored retirement plans that will allow investors to buy an annuity.
• The new offering, Target Retirement Lifetime Income Trusts, will incorporate TIAA’s Secure Income Account.
• The TIAA Secure Income Account portion of the portfolio is capped at approximately 25%, with the remainder in stocks and bonds.

Vanguard is joining the push to offer investors a regular income stream in retirement. The asset-management company is developing target-date funds for 401(k)s and other employer-sponsored retirement plans that will allow investors to opt for a lifetime annuity.

The move is a reflection that while saving for retirement has gotten easier in some respects, thanks to innovations such as target-date funds, the draw-down phase is hard for some people. Managing cash flows can be a struggle.

“Clients are looking for ways to draw down their retirement savings that is specific and meaningful to them,” says David Stinnett, head of strategic retirement consulting at Vanguard. “This is one way to address that need.”

Target-date funds—the workhorses of many retirement plans—contain a mix of stocks and bonds. They automatically adjust that mix to a more conservative allocation as the fund approaches its target date, typically the year an investor expects to retire.

Vanguard’s new offering, Target Retirement Lifetime Income Trusts, will incorporate TIAA’s Secure Income Account as a lifetime income annuity option. The funds will be available in 2026, Vanguard said Wednesday.

Vanguard’s website says the new target-date series will be able to gradually allocate part of the portfolio to a deferred fixed annuity to provide guaranteed retirement income. The TIAA Secure Income Account portion of the portfolio is capped at about 25%, with the rest consisting of stocks and bonds. A plan participant can choose whether to receive some or all of their SIA holdings as an annuity when they retire, according to Vanguard’s website.

That optionality is important because some investors choose to swap their target-date funds for a more bespoke portfolio when they reach retirement.

Vanguard’s Stinnett says the new fund series is ideal for is 401(k) plan sponsors who are interested in providing a multi-asset portfolio that includes a component that can be converted to a guaranteed income stream. “Having it embedded in the product in which you have been saving all these years makes it very easy,” he says.

The new fund series comes amid other changes at Vanguard since CEO Salim Ramji took the helm in 2024. This week, the company began allowing customers to buy cryptocurrency exchange-traded funds and mutual funds on its brokerage platform, reversing a ban. It has also been launching more actively managed ETFs, both equity and fixed income.

Vanguard is one of the nation’s largest asset management companies, and a leading provider of target-date funds. Its target-date funds are among the most popular, representing more than a third of the over $4 trillion invested in that category, according to Morningstar’s analysis. Adding an annuity option to target-date funds can create more reliable payouts and reduce investors’ vulnerability to market volatility early in retirement, according to Morningstar .

A market downturn shortly after an investor leaves the workforce can crimp their income later on if they have to sell at reduced prices to cover their living expenses.

Vanguard’s announcement comes as other asset managers experiment with adding annuities to target-date funds. Pension plans have become rarer, and Americans have increasingly relied on 401(k) and other defined-contribution plans to save for retirement.

Although target-date funds with annuities may have promise, they have yet to be adopted widely. While Morningstar’s analysis notes that BlackRock’s LifePath Paycheck assets have grown to $25.7 billion by October from $9 billion in May 2024, that is a fraction of the trillions of dollars in target-date funds.

Lauren Valente, head of Vanguard Workplace Solutions, said that by working with TIAA, Vanguard can give plan participants another option to turn a portion of their savings into income. “Retirement isn’t one-size-fits-all, and for those who want more predictability, guaranteed income can provide added peace of mind alongside their savings,” she said.

TIAA specializes in retirement plans for universities and nonprofits. Colbert Narcisse, chief product officer and head of insurance solutions and new markets at TIAA, said the goal is to make it easier for plan sponsors to offer participants a low-cost and secure path to retirement. “This collaboration reflects our commitment to delivering forward-thinking retirement solutions that meet the evolving needs of today’s workforce,” Narcisse said.

Write to Andrew Welsch at andrew.welsch@barrons.com