As Good as Annuity
Annuities are surging in sales as the security blanket option for retirees no longer willing—or able—to depend on the ups and downs of the market, defined benefit plans, and Social Security. Last year, total individual annuity sales increased by 8%, according to LIMRA International, with variable annuities growing by 15%. Advisers are critical to the annuity discussion—whether educating participants about distribution options, conversing with providers on products best suited for the market, or counseling plan sponsors on rollover annuity options.
Although most qualified annuity assets are still held through individual retirement accounts (IRAs), Cerulli Associates found that 79% of advisers said they would recommend annuities (either deferred, immediate, or both) for a portion of rollover dollars. That number is an increase from 73% in 2005.
The “New” Annuity
During the high earnings in the stock market of the ’90s, annuities were marketed for their tax deferral benefits, but in lieu of current, less favorable market conditions, and a base demographic seeking retirement income solutions, they are more heavily promoted now for guaranteed income features, says Lisa Plotnick, Associate Director of Cerulli Associates. The draw of annuities will only increase as future generations are less and less likely to have defined benefit plans, she adds.
People have become more interested in annuities of late because of the guaranteed lifetime income features, agrees Kirby Noel, Senior Vice President and National Sales Manager for the Financial Planner Channel of AXA Distributors LLC, the wholesale distribution division of AXA Equitable Life Insurance Company. Nowadays, the industry consensus is that retirees need to continue to be invested in equities after retirement or they likely will run out of money in retirement, Noel says. The problem is, those nearing, or in, retirement might be afraid to invest in equities. “What these guaranteed lifetime income products do is give them the peace of mind and confidence to invest in equities,” he says. “What an adviser is doing is using these living benefits as a safety net to encourage people to invest in equities and then, ultimately, to stay invested.”
Annuities have proved to be a valuable source of income in retirement, especially with longer expected retirement periods. A recent study by Ibbotson Associates found that a combined portfolio of variable annuity, a guaranteed withdrawal benefit, and traditional non-annuity products had higher average total income return over a 30-year investment period than a diversified, non-annuity traditional portfolio (such as mutual funds). Experts say retirees cannot afford to not have some type of annuity in their portfolios in order to provide a guaranteed income stream, and employers are beginning to recognize their role in the distribution phase of retirement, whether through providing a product or education.
Price of Guarantee
While the current generation of annuities has come a long way in terms of cost-efficiency, fees remain a concern. Peng Chen, President of Ibbotson Associates, says insurance companies could reduce cost further and simplify the products to focus on those features most beneficial to investors—for instance, the income benefit is a more valuable feature than the death benefit for many investors. “We are seeing insurance companies doing that—both lowering the fees and concentrating on the features that are most valuable,” he comments.
Of course, higher fees are necessary to permit the sponsoring company to offer the guarantee while maintaining margins. “To the extent that these guarantees are valuable to the investor, then these fees are reasonable,” Chen continues, “but some people may not need the guarantee.” In reality, not every client cares about the bells and whistles of retirement income. Some experts say a mutual fund wrap will suit most people just fine but, if they seem drawn to the idea of the guarantee, then annuities will be a good fit.
If You Build It, They Will Come
The important thing for an adviser selling an annuity is to recognize what features the participant is looking for and only provide those features, and new regulations require this transparency (see ‘FINRA Increases Suitability Requirements for Sale of Variable Annuities,’ below). The adviser perspective is crucial to distribution planning. “Corporate America has basically said, you need to do this yourself and the government is not going to help you out. There’s a great need for advice and information, and professional advisers should benefit from that,” says Adam Sherman, President and CEO of Firstrust Financial Resources, LLC, in Philadelphia, Pennsylvania. As far as annuities, in the right situation they work nicely but are not the answer to everyone’s problems, he says.
Sherman echoes what many in the retirement industry have said: There is no one-size-fits-all approach to retirement income products. As a result, adviser recommendations for annuitizing a portfolio are all over the board. Some will suggest putting as little as 5% in an annuity vehicle, some as high as 50%. Generally speaking, an annuity makes the most sense for most middle- and upper-income Americans—typically those with a modest pool of income and in good health who want an income stream to protect their basic needs, says Rex Linkenbach, Investment Advisor Representative for Princor Financial Services Corporation in Mansfield, Ohio. “I don’t see a trend in any specific area other than the fact that people are looking for a guaranteed flow of income that they can count on,” he says. “Then, you build from there according to their risk tolerance.” Linkenbach notes that, while it is an exciting time for advisers, it is also challenging, because the distribution phase of retirement requires a different skillset, such as utilizing more life planning.
Anthony M. Franchimone, Managing Partner at The Founders Group, a National Retirement Partners firm in La Jolla, California, says many participants will come to his practice naturally at distribution time because of a relationship built through educational meetings during the accumulation phase. When distribution is nigh, Franchimone shows participants literature comparing the mutual fund model and the annuity model, explaining the advantages and disadvantages and all costs associated with both. He goes so far as to insist that participants sign the literature, as an added confirmation that they feel it was explained to them. He is open about the fact that the mutual fund would make more sense in an ideal world where the market is always up, but acknowledges the benefit—and extra costs—generally associated with the guaranteed annuity benefit. He finds most participants at least entertain the idea of going the annuity route, and expects annuities to become more cost-effective and efficient with increased usage and visibility, just as retirement plans have. “Just like any other progression, things get better as time goes along. I think we’re already seeing it, and I expect that to continue,” he says.
Ready To Roll Over
One option for plan sponsors that want to facilitate a linkage between annuities and 401(k)s is Hueler Company’s Income Solutions platform, a Web-based immediate income annuity purchase system that allows individuals to purchase institutionally priced annuities with their rollover IRA or defined contribution plan assets. CEO Kelli Hueler says the company now provides institutionally priced annuities to 250 plans, up from 50 as recently as 2005. Hueler sees more plan sponsors coming to her directly expressing interest in the platform. “I think the challenge we face today is encouraging plan sponsors to switch priorities from the accumulation phase,” she says.
While that product allows participants to choose from a variety of annuities through one window, other annuity products gradually are hitting the market specifically as rollover options, emphasizing what they know clients want: features without the fuss. Many are not yet widely available for all plans, but their presence is a notable trend. For instance, AXA Equitable recently launched a new variable annuity—Crossings: My Lifetime IRA—designed specifically as a rollover option for employees taking distributions from employer-sponsored retirement plans at Fortune 1000 companies. The guaranteed annual payout (GAP) amount is 5% of the participant’s income base, which is equal to the amount of their initial rollover contribution. The GAP can go up, but it can never go down based on market performance, even if the account balance goes to zero, the company says.
Phoenix Companies offers Income Edge through Lockwood Capital Management—the first product from their alternative retirement solutions division. The income guarantee can be switched on and off or stepped up, and the withdrawal amount can be changed. Kathy Cody, Senior Vice President of Alternative Retirement Solutions at Phoenix, says this product was developed in response to some of the concern about annuities—that they are high cost and too complex. The Income Edge, therefore, tries to minimize costs by not offering a commission (advisers receive a fixed fee, currently at 100 basis points) or a guaranteed death benefit.
The i4LIFE employer-sponsored rider by Lincoln Financial Group also markets its flexibility. It allows for investors to change their investment options within the annuity, the ability to take withdrawals in addition to their regular income payments, and a guaranteed floor for annuitization payout. “Usually when people are purchasing a traditional annuity they don’t have a lot of flexibility, and i4LIFE is a solution for that,” says John Weber, Second Vice President of Product Development for Lincoln Employer Markets.
Providers and sponsors are relying on advisers as a sort of central point to get the word out. According to Lincoln’s Head of Worksite Product Marketing Jodi Golm: “The plan sponsor making available a plan that has a wonderful distribution product is a conversation that’s being had more and more every day. Advisers are critical in acting in the role of making participants aware of their options.’
[sidebar:] DoL Proposal Would Guide Annuity Provider Selection
Last September, the U.S. Department of Labor (DoL) issued two rules under the Pension Protection Act (PPA) relating to choosing an annuity provider for distributions from defined benefit and defined contribution plans.
The agency’s proposal includes the following proposals: an interim final rule amending Interpretative Bulletin 95-1 to limit the bulletin’s application to the selection of annuity providers for defined benefit plan distributions, and a proposed rule to provide guidance, in the form of a safe harbor, for annuity provider selection fiduciaries for benefit distributions from individual account plans, such as 401(k)s.
According to the DoL, under the proposed safe harbor, fiduciaries must: conduct an objective, thorough, and analytical search to identify and select providers; consider the need to engage an expert to assist in its evaluation of providers; and appropriately conclude that the annuity provider would be financially able to make all future payments under the contract, and the cost of the contract is reasonable in relation to the benefits and services to be provided under the contract.
The PPA required the DoL to issue regulations clarifying that the selection of an annuity contract as an optional distribution from an individual account plan is not subject to the “safest available’ standard under Interpretive Bulletin 95-1, but is subject to all otherwise applicable fiduciary standards. —Fred Schneyer
[sidebar: ] FINRA Increases Suitability Requirements for Sale of Variable Annuities
Rule 2821 from the Financial Industry Regulatory Authority (FINRA) increases suitability requirements for the purchase or exchange of deferred variable annuities. When selling an annuity, registered representatives are required to obtain a detailed customer profile as well as have reason to believe that the specific variable annuity is suitable for the client—evidenced by a signed document by the representative making the sale. The rule, effective August 4, requires a principal review for all transactions and a written procedure in place to achieve compliance. The section of the rule effective May 5 says that firms must have training programs for representatives who sell variable annuities and principals who review them. “Among other factors, firms must include training on the material aspects of deferred variable annuities,” according the regulatory notice. The full text of Rule 2821 is available at www.finra.org/notices/07-53. —EB
*Illustration by Red Nose Studio