UBS Global Asset Management is hoping a set of mutual funds with a guaranteed lifetime income option will help its new defined contribution business take off.
The Chicago unit of UBS AG, which has long had a defined benefits business, launched its defined contribution and retirement solutions group in June. Two months later it unveiled a set of target date funds, and announced a partnership last month with Genworth Financial Inc., to offer its funds with a guaranteed lifetime income option to 401(k) plans. "This kind of completes the puzzle for us and brings us to a more complete solution," said Drew Carrington, the group's head. "We think this is a real opportunity to bring all the pieces together."
UBS is one of several companies — including Hartford Financial Services Group Inc., Metropolitan Life Insurance Co., and Prudential Financial Inc. — offering 401(k) options designed to ensure retirees do not outlive their savings.
A report issued by Boston consulting firm Financial Research Corp. says such options will gain acceptance gradually, and guaranteed retirement income "will eventually emerge as an asset class."
The UBS products will allow 401(k) participants to withdraw 5% of their highest annual locked-in portfolio value for life, even if the withdrawals ultimately exceed the value of their portfolios. Genworth Life and Annuity Insurance Co. will issue the guarantee.
UBS designed the funds to address risks for retirement investors. The funds incorporate inflation-protected Treasury securities to hedge against inflation risk.
John Payne, the head of alliances and distribution for the defined contribution group, said it provides tools to help participants assess if they are contributing enough to their accounts.
Critics have been railing against the idea of variable annuities within qualified retirement plans, citing issues regarding fees.
Robert Ellis, a senior analyst at Boston research firm Celent LLC, said annuities with lifetime income riders can carry annual costs of 3% or more, about double the cost of institutional funds.
Still, UBS is "absolutely right that longevity risk is a real concern to retirees," Mr. Ellis said. "UBS is a great brand. That will at least get them in the door."
UBS executives insist that their product is not a variable annuity, and that structural differences will make the products less expensive.
"The cost will be very compelling as compared to the existing suite of annuity options in the marketplace," Mr. Payne said.
Tim Benedict, a spokesman for Hartford, said the UBS-Genworth offering is not a threat to his company. Its two-year-old Lifetime Income product, a fixed deferred income annuity, is structured as a share class within defined contribution plans; each share guarantees $10 a month of lifetime income starting at age 65.
"This is a very new market, and we are all working together to build awareness of the concept of having annuities as an option within retirement plans," he said.
UBS executives did not say how much they expect to add from the initiative, but Mr. Ellis said growth is likely to come slowly, given the long lead times in the business.
Mr. Payne said his company's target-date funds position it to capture assets as a result of the Pension Protection Act of 2006. That law eases the way for plan sponsors to invest employee retirement funds automatically in "default investment alternatives" such as target date funds.
UBS is targeting large companies, he said, including employers with defined benefit and defined contribution plans. "We have found that as these sponsors make changes to their defined benefit plans, they are also contemplating DC plan changes," Mr. Payne said. "We envision that an end-to-end solution set covering DB and DC plans will be in demand."
In October, UBS announced a partnership with Dallas' Affiliated Computer Services Inc. to offer plan sponsors administration for both types of plans.
