Security Benefit Research Touts Use of FIAs

Security Benefit Corporation released a series of reports suggesting fixed indexed annuity (FIA) products increase potential for retirement success.

 

The reports, “Planning With Certainty: A New Strategy For Retirement Income,” indicater FIAs used in combination with traditional retirement portfolio strategies significantly improve the chances of creating sustainable income throughout retirement. Security Benefit Corporation conducted the research with a leading independent actuarial consulting firm on various joint and single life retirement scenarios.

The study’s researchers sought to determine the best allocation among a range of investment choices to optimize chances for retirement planning success, specifically not running out of income and leaving assets behind. Using an approach similar to modern portfolio theory, the analysis considered allocations between three modern strategies: 

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•       Mutual fund systematic withdrawal (base case)
•       Variable Annuities (VAs) combined with mutual fund systematic withdrawals, and
•       FIAs combined with mutual fund systematic withdrawals.

 

 

(For strategies that included either an FIA or a VA with a Guaranteed Lifetime Withdrawal Benefit (GLWB), retirement income was funded by mutual fund withdrawals for the first 10 years of each projectionperiod, and then from the GLWB.) 

Based on the research’s optimal retirement income allocation, the point along the efficient frontier that best reduced the risk of failure and heightened the odds of success included an FIA with a GLWB in the portfolio mix. The analysis further suggested that combining FIAs with a GLWB and conventional mutual fund spend-down strategies produced higher potential for achieving the goals of a personal retirement income plan.

While the analysis strongly suggests that retirees will not be able to finance a sustainable retirement income with only one traditional product class, it also suggests that implementing a framework that mixes and matches mutual funds and FIAs in various combinations can be an effective way to utilize available resources to generate lifetime income, protect against expenses related to unforeseen events, and help maintain purchasing power over the life of a retiree.

The research reports are available here.

 

Most Recordkeeping RFPs to Benchmark Fees

Recordkeeper search activity is expected to increase; however, most requests for proposals (RFPs) will only serve to benchmark pricing, according to Cerulli.

“More than half of plan sponsors have indicated they are likely to conduct a search for recordkeeper within the next two years,” said Kevin Chisholm, senior analyst at Cerulli Associates. “However, many of these plan sponsors have no intention of leaving their current recordkeeper.”  

In Cerulli’s recent report, “State of Large and Mega Defined Contribution Plans: Investment Innovation and the Plan Sponsor Perspective,” 41.9% of plan sponsors surveyed indicated they expect to do a recordkeeper search in the next two years, but only to benchmark pricing. Only 13% of plan sponsors said they expect to perform a search because they are actively seeking a new recordkeeper.  

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“There is concern that the current emphasis on costs will increase the frequency of provider searches and force recordkeepers to re-bid on plans before they become profitable,” Chisholm said. “About 60% of plans have been with their current recordkeeper for more than three years. But, a significant percentage, slightly more than 40%, have been with their current recordkeeper for less than three years.”  

The report examines the new ideas and products that have been developed for defined contribution (DC) plans in the large and mega segments (Large = $250 million to $1 billion, Mega = $1 billion +). It includes analysis of plan sponsors’ perspective of their DC plans and the likelihood of implementing new plan designs.    

The report provides asset managers, recordkeepers, and consultants with a window into plan sponsor thinking via a proprietary survey administered to more than 250 plan sponsors that fall in the large and mega segment. Other data contained in this report comes from surveys of DCIO asset managers. More than 30 conversations with executives at recordkeepers, investment consultants, and asset managers support the data and findings.  

The report is available for purchase by contacting CAmarketing@cerulli.com.

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