Report : Investment | February 08, 2022

Annuities and TDFs: What is the right approach?

The retirement industry has struggled for years with solving the puzzle of helping investors draw down assets in retirement—and for good reason. There is no silver bullet or single solution that can adequately meet the individual needs of all retirees.

To address this challenge, annuities are sometimes presented as an ideal way to generate retirement income. But our research consistently comes back with the same conclusion: While annuities can make sense for some participants, they are not appropriate for all participants who are relying on a default solution such as a target-date fund (TDF).

In this article, we examine the pros and cons of annuities, where we believe they fit into a retirement income offer, and why we ultimately chose not to include them as part of our default solution for TDFs.

Annuities as an option, not a default

Participants saving for retirement are well served by TDFs with their prescribed asset mixes and glide paths. But the challenge of helping workers shift from accumulating assets to generating retirement income does not lend itself to a one-size-fits-all approach.

Annuities—primarily immediate and deferred fixed income annuities—can be a reliable source of stable income to cover basic living expenses in retirement and mitigate market and longevity risks.1

As plan sponsors and consultants compare retirement income solutions, they sometimes ask us: Why aren't annuities included in Vanguard's default option for retirees? After all, following the passage of the SECURE Act in 2019, some providers launched TDFs that included an annuity in their glide paths.

As the industry's largest TDF manager and a provider of annuity products to retail investors for over two decades, we've asked ourselves the same question about annuities in TDFs and have studied it intensively.

Why they're not right for everyone

We believe that annuities may be a good option for some participants—specifically those retirees whose basic living expenses aren't covered by existing sources of guaranteed income such as Social Security.

But here's why we don't believe they are appropriate for all participants who are relying on a default solution such as a TDF: By their very nature, TDFs rely on the concept of asset accumulation as a relatively straightforward strategy that can be applied to a broad group of participants. But generating retirement income is a more nuanced challenge. We don't believe it can be solved by using a single input (the expected retirement date) to inform a potentially irrevocable decision to annuitize a meaningful portion of a participant's retirement savings within TDFs.

Our research shows that retirees have a wide range of different goals, including basic living expenses, contingency reserves, discretionary spending, and legacy spending. Participants' prioritization of these goals, their risk tolerance around meeting each goal, and their available resources at retirement can vary quite dramatically. This, combined with the unique health, longevity, and tax situation of every participant, makes it very difficult to apply a single solution in retirement that adequately meets each participant's unique desires and needs.

Choosing an annuity is a personal decision

To summarize, here is a list of subjective considerations that underscore why choosing an annuity is a highly personal decision:

  • How long does the participant expect to live given current health and family history?
  • How much of the participant's accumulated wealth should be annuitized?
  • What is the best time for the participant to purchase an annuity?
  • Which annuity is the best choice? It can be hard to compare products without expert help.
  • Is the peace of mind that an annuity might bring worth the annuity's cost?
  • Can the participant become comfortable exchanging liquid assets for an illiquid contract with an indefinite payoff?

The last question touches on an important behavioral issue. Financial situations and needs can change during retirement, adding to the appeal of holding on to liquid assets. Many investors don't like the idea of giving up a meaningful portion of their accumulated wealth because they fear "buyer's remorse" should their circumstances change.

It's also important to note that competitors that offer TDFs with annuities often do so through a separate TDF series. With Vanguard's series, there is no need to switch participants to another fund or trust, which can trigger new due diligence and participant education. Plan sponsors have repeatedly told us they prefer linking a retirement income offer to an existing series rather than switching to an entirely new series.

We also find that for many investors, retirement income needs can be successfully met using their investment assets (usually supplemented by Social Security and/or pension income) and implementing a dynamic spending strategy. This approach allows retirees to maintain access to and control of their assets. 

A customized approach

For these reasons, we have decided not to pair annuities with TDFs as our default solution. Instead, we provide the option to annuitize for those participants for whom it could be a good fit. As part of our retirement income offer, participants have access to Income Solutions, Hueler Investment Services' annuity platform, which provides a greater variety of options than many competitors that present only proprietary annuity products. Those interested in securing guaranteed income can use the Hueler platform to purchase an institutionally priced out-of-plan annuity that is best suited to their unique circumstances, whether it be 10%, 20%, or more of retirement savings.

Keeping a broad view

Taking a broad view of retirement income, we are helping investors understand all their options for drawing down their retirement savings. This table takes a look at the pros and cons of three ways to generate retirement income.

Retirement income options Pros Cons
Vanguard Target Retirement suite
  • Transparent and easy to understand.
  • Flexible for participants' evolving needs.
  • No change of product required.
  • Cost-effective.
  • Holistic approach for unique participant goals.
  • Retirement income subject to market returns.
  • Investor choice required to use product effectively.
QDIA-embedded annuity
  • Income guaranteed in retirement.2
  • Significant suitability concerns.
  • Higher cost.
  • Change of product usually required.
  • Participant education on new investment type required.
In-plan annuity
  • Income guaranteed in retirement.2
  • Can be more customized to investor needs.
  • More flexible costs, as plan sponsor can shop providers.
  • Possible suitability concerns.
  • Higher cost.
  • Third-party (insurer) risk.
  • Investor choice required to use product effectively.

Our enhanced retirement income offer

Vanguard's recently announced retirement income offer provides solutions and experiences at no extra charge. Our offer helps plan sponsors meet the unique retirement income goals of each participant. We believe that taking a holistic approach can provide the financial and emotional value necessary to support a participant's retirement goals.

Based on our ongoing research, coupled with feedback from plan sponsors around what is most important to their participants, we continue to believe that an annuity shouldn't be the primary—and certainly never the only—option provided.

At Vanguard, we are dedicated to helping investors achieve the best retirement outcomes, and we believe that retirement income is a crucial component of comprehensive financial well-being. We look forward to working with you on enhancing our retirement income offer and helping solve the retirement income puzzle for your participants.

When can an annuity be appropriate?

Annuities often get a bad rap. Dubious sales practices and high fees have led to a saying in the industry that annuities are not bought, they're sold. But while there have been some questionable motives over the years, the primary idea behind an annuity is sound: It provides a guaranteed income stream throughout retirement.

Annuitizing a portion of an investor's retirement savings can make sense for some individuals. For example, an annuity could be a solution for investors who:

  • Expect to live a long life.
  • Have a low risk tolerance and are concerned about outliving their assets.
  • Can maintain an adequate pool of assets to meet unexpected expenses after purchasing the annuity.
  • Have no legacy intent for the money used to purchase the annuity.

As they plan for retirement, such investors may anticipate a gap between living expenses and income. It's a gap that an annuity can help to fill.

1Deferred variable annuities are long-term vehicles designed for retirement purposes and contain underlying investment portfolios that are subject to investment risk, including possible loss of principal. Immediate variable annuities contain underlying investment portfolios that are subject to investment risk, including possible loss of principal.

2Product guarantees are subject to the claims-paying ability of the issuing insurance company.


  • For more information about Vanguard funds, visit or call 800-523-1036 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
  • All investing is subject to risk, including the possible loss of the money you invest.
  • There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Fund has a fixed investment allocation and is designed for investors who are already retired. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.