One example of these wrap products is Great-West’s SecureFoundation®. SecureFoundation is a product designed for the defined contribution market that provides benefit protections as of a date certain, e.g., after age 55. Great-West charges 90 basis points in addition to the underlying investment management fees. However, says Nelson, the additional fees do not have to be paid over the participant’s entire lifetime, but only in the last 10 years prior to retirement. For example, he says, if a participant wants to retire at age 65, he can start paying for the protection when he is 55.
Wray notes that, while these wrappers do dampen volatility, they also reduce overall returns because participants are charged for them. Nelson, however, compares it to buying insurance. People typically buy insurance to protect their house or their car, he says; now, they can buy insurance to protect their retirement.
Furthermore, argues Nelson, by buying these wrappers, participants can maintain a higher equity exposure, which could counteract the additional cost. In the defined contribution markets, glide paths typically reduce equity exposure as participants near retirement, says Nelson, but the new products allow participants to have higher equity exposure than they might otherwise have had because the income is protected. Rather than reduce equity exposure when nearing retirement, participants can buy insurance, keep their equity exposure, and benefit if the market goes up.
Sponsors are looking at these new products, says Wray, but there has not been a big take-up rate because they are new.
Outside the plan, the retirement income market traditionally has been dominated by individual variable annuities, says Nelson. While there have been a number of changes recently, he says, costs increased significantly since the fourth quarter of 2008, primarily because of hedging costs providers pay to make the guarantees.
However, things are changing even in this market. People want to stay actively invested in the equity market, says Nelson, so we are seeing a trend of having ’40 Act mutual funds with retirement income product wrapped around them.
Vendors also are coming through with products to help retirees manage their retirement income flow. Merrill Lynch Global Wealth Management recently launched My Retirement Income™, says Roy, which connects customized retirement income planning with the Bank of America, N.A., retail banking network. My Retirement Income allows clients nearing or in retirement to plan out for the long run their retirement income, and execute it to get a paycheck.
There even have been changes on the sponsor side. To get around limitations presented when annuities are offered as a distribution vehicle inside the plan (see “Holding Patterns,” below), vendors are creating products that employers can offer outside the plan, says Wray. Participants can roll over their money into an IRA and be delivered an institutionally priced annuity. This way, says Wray, the annuity is a lot less expensive than if employees were to buy them on their own.
Had these products been available prior to the financial crisis, says Nelson, participants near retirement and retirees could have been somewhat protected. That is what is driving plan sponsors and participants to look at these products despite the extra costs, he says.