VA Net Sales Hit New Low

Widely misunderstood and often not well represented, annuities still attract a lot of interest because they represent what most people desire most: fixed guaranteed income for life. 

Variable annuity net sales are reaching new lows, causing U.S. insurers to innovate toward retirement income opportunities, says Cerulli Associates.

The industry is poised for product transformation that will satisfy the consumer demand for annuities that provide guaranteed monthly payments in retirement, potential for account growth, tax deferral on the earnings, and asset protection by insuring a minimum value of payments from the account, according to a report from the global analytics firm, “Annuities and Insurance 2014: The Evolution to Sustainable Retirement Income Solutions.”

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The annuity industry is still rebounding from a period of decline when the living benefit wars resulted in a number of companies—including Hartford Life, Sun Life, Genworth, and ING (now Voya)—exiting the space in 2011. In 2012, the industry suffered a $20 billion sales decrease.  

After two years of industry upheaval, insurers believe the availability of variable annuities with living benefits remains relatively stable. In fact, nearly 70% of all insurers surveyed by Cerulli believe the availability of living benefits will remain the same as it is today over the next three years. Only 19% believe there will be an increased number of offerings.

In 2013, in contrast, 50% of both insurers and asset managers believed the number of living benefit offerings would dip.  In 2014, that figure dropped to below 13% for insurers, but remained high at 31% for asset managers. Cerulli believes the difference in industry forecasts stems from the extensive list of safeguards insurers put in place between 2012 and 2014 as they worked to lower their costs of risk mitigation and hedging to achieve an appropriate risk profile.

Following a dip in supply of traditional variable annuities that offer rich guaranteed living benefits, the annuity marketplace is undergoing significant fragmentation, says Chris Nadai, senior analyst at Cerulli. 

Cerulli forecasts that the market will double its segments from three—traditional variable annuities, fixed-indexed annuities, and fixed annuities—to six by 2019. These segments will be: investment-only variable annuities, guaranteed variable annuities, fixed-indexed annuities, single-premium immediate annuities (SPIAS), deferred income annuities (DIAS), traditional fixed annuities.

“Given the recent restrictions and reduction of benefits for traditional variable annuities, the adviser and investor have shifted the demand curve to buying these benefits in separate products from insurers to reduce annual fees and risk of future benefit changes,” Nadai says. “The products also have greater appeal in their simplicity, given that traditional variable annuities are too complex for some advisers and many consumers to understand.”

Cerulli suggests that the industry consider creating an educational advertising campaign that focuses on how only annuities can provide the guaranteed retirement income that retirees need for their financial security. In 2014, client requests for annuities dipped by 6%, according to Cerulli’s data, showing that the insurance industry needs to invest in a public awareness campaign in the near future.

“The annuity industry must tap new sources of assets to increase net sales, whether it is accomplished by enticing fee-based advisers, younger generations, or constructing in-plan guarantees (e.g., defined contribution plans),” Nadai adds. “While this recommendation aids in boosting the industry’s asset base, it would also assist the industry in overcoming the negative perceptions of relying on 1035 exchanges.”

The report focuses on three key areas of the annuities and insurance markets: distribution, product development, and the asset management of core products, including variable annuities, fixed annuities, equity-indexed annuities, and life insurance. The report leverages continuous analysis of the variable annuity, insurance, and insurance sub-advisory marketplaces.

More information on “Annuities and Insurance 2014: The Evolution to Sustainable Retirement Income Solutions,” including how to purchase a copy of the report, is here

After-Tax Accounts As a Path to Roth IRAs for High Earners

A new rule for retirement plan distributions makes way for high earners to get into Roth IRAs.

Under Roth individual retirement account (IRA) rules, only singles whose modified adjusted gross income (MAGI) is $131,000 or less in 2015, or married couples whose combined MAGI is $193,000 or less, can contribute to a Roth IRA.

However, a couple of months ago, the Internal Revenue Service (IRS) announced a rule that would allow certain high earners to earmark some of their savings as Roth after-tax amounts, according to a speaker at a webinar sponsored by retirement plan advisory firm Cafaro Greenleaf.               

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David Flinchum, certified public accountant (CPA) and partner at Berlin, Ramos & Company, based in Rockville, Maryland, explains that Roth IRAs offer certain advantages for saving for retirement—earnings grow tax free, and there are no required minimum distributions (RMDs). But, high earners are not able to take advantage of Roth IRAs.

With IRS Notice 2014-54, plan sponsors have a new way to consider helping high earners get money into a Roth IRA, Flinchum says. The notice establishes a new rule allowing the direct rollover of after-tax contributions from a qualified retirement plan to a Roth IRA at the time of a distributable event.

Flinchum explains that there is a provision for 401(k) plans by which all employees are permitted to make non-deductible after-tax contributions into the plan. Voluntary after-tax contributions are different from Roth contributions: They do not have to come through payroll deduction, and while contributions are not taxed when withdrawn, earnings on those contributions are, so plans have to account for earnings separately. This type of contribution has been permitted for decades, he says, adding that voluntary after-tax contributions do not count towards the 402(g) maximum deferral limit, but do count for the 415 annual plan additions limit.

The IRS has always permitted after-tax accounts to be rolled into IRAs, but previously, that could not be done via a direct rollover; the plan participant had to receive a distribution first, and within 60 days would have to come up with the amount of taxes taken out of the after-tax account distribution to roll the total amount into a Roth IRA. Flinchum notes that earnings on voluntary after-tax account contributions must be rolled into a traditional IRA.

Should plan sponsors amend their plans to add voluntary after-tax contributions so high wage earners can get into a Roth IRA when their accounts are distributed? Flinchum says if a plan has a lot of high wage earners who are not part of the highly compensated employee (HCE) group for nondiscrimination testing, adding voluntary after-tax contributions can work well to help these high earners earmark savings for a Roth IRA. However, it wouldn’t work as well if the high earners in the plan are also HCEs, because having the HCEs contribute more would make nondiscrimination testing harder to pass—unless non-highly compensated employees (NHCEs) have high deferral rates.

For safe harbor plans, which generally do not require nondiscrimination testing, if the plan allows for voluntary after-tax contributions, plan sponsors must do an average contribution percentage (ACP) test for them. If no NHCEs make after-tax voluntary contributions, the test will fail.

Flinchum suggests plan sponsors discuss with their plan advisers or service providers whether the option should be offered in retirement plans. As all plans have to be restated by the spring of 2016, now is a good time to have the discussion, he says.

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