Workers of the baby boom population are painfully aware that if they lose their savings in another financial crisis, they won’t have enough working years left to earn it back before retirement. About 78% of respondents age 50 and older in one poll say retirement security has become a more important issue for them in the last two to three years.
No wonder 62% told benefits researchers Towers Watson that they would give up some pay for a guaranteed retirement benefit in the consultants’ 2013/2014 Global Benefit Attitudes Survey, released last month. With employer-sponsored retirement plans still skittish about adding guaranteed income policies to their platforms, those near or in retirement may turn to their familiar financial advisor or RIA for help figuring out the best annuity for them. But will offering that advice open advisors to fiduciary liability?
“You advise people to do something, you become the fiduciary—game, set, match,” says attorney Marcia S. Wagner, founder of the Boston-based Wagner Law Group. “So they better be damn sure they know what they’re advising.” To that end, Wagner recommends advisors take a crash course in annuities, especially the variable and indexed annuities, since guaranteed income riders are commonly added to them, sometimes providing payments up until death. And that’s a long time to be monitoring an annuity provider.
“It’s a continuous job,” says Wagner. “Financial advisors are now in a situation where to stay in the industry they must have a working knowledge of guaranteed lifetime withdrawal benefits, independent of whether they want to be fiduciaries or not. They must be able to educate people. And if they can’t, they need to partner with people who can.” Wagner sees this as part of an evolving trend in best practices for advisors. “Baby boomers want paychecks for life,” she adds.
This form of insurance has attracted the interest of regulators, too, who want to make defined contribution plans (in which workers are responsible for their own saving and investing with an employer’s help if not always its money) look more like defined benefit pension plans. DB plans, like your father may have had, kept the liability of a lifetime monthly pension payment with the employer. To give today’s employees some savings protection and income guarantee, regulators, like the Department of Labor, want to incentivize plan sponsors to add in-plan annuities to their DC platforms. But the task of vetting and selecting one or more annuity providers and monitoring them for the life of each employee is expected to test the capacity of most sponsors and their ability to pay for such long-term services.
Among several possible solutions being considered is turning to investment advisors or fund providers to vet and monitor insurers, but so far the major companies in those industries are not offering to take on the fiduciary responsibility. Wagner says a limited liability of, say, two years might work, before the fiduciary obligation reverts to the employee or retiree. That would be similar to the Labor Department’s current safe-harbor guidelines for distributing retirement plan assets upon retirement. The sponsor’s liability ends when the funds are transferred.
Sponsors are already being nudged by the Department of Labor, in a recent list of “tips,” to offer participants more custom investment options, such as custom target-date funds. The use of local financial advisors, who would hopefully have a more comprehensive picture of a participant’s financial needs, is also being considered. The option has “generated a lot of interest in the role local advisors or planners may play,” notes Catherine Gordon, a principal in Vanguard’s Investment Strategy Group.
Clients will be asking for help in the “decumulation” stage of retirement, too, says Wagner. “This could be as or even more important than the savings stage.” This post-retirement period really is the culmination, the final test, of a lifetime of retirement planning. The careful distribution of these monies is crucial to elderly clients, who are totally dependent on their savings. This is where the diligence in vetting a company now will pay off 30 or 40 years down the road.
The specter of policy defaults loom. Though rare in the industry, they have happened. The ’90s saw several large insurers go under: Executive Life Insurance Co. of California, which had A.M. Best’s highest rating until January 1990, failed in1991. Mutual Benefit Life Insurance Company of Newark, Confederation Life Insurance Co. and California-based First Capital Holdings fell because of asset runs by investors. Today, Wagner believes, “some of the state insurance guarantee funds would have a very difficult time trying to make someone whole. Someone buys an annuity thinking, ‘I’m safe.’” She cautions that advisors have a duty to know the insurers’ assets, surpluses, reserves, lawsuits, complaints—and where the companies are based, since guarantee funds vary widely from one state to the next, she says.
And troubled insurers are not just a thing of the past. The Phoenix Companies of Hartford, Conn., which makes guarantees on variable and fixed indexed annuity contracts, including products with guaranteed minimum accumulation benefits and guaranteed minimum withdrawal benefits, has lost its Moody’s rating because there was insufficient financial information on the company. The Phoenix Companies filed its 10-K for 2012 on the last day of 2013. The SEC issued a cease-and-desist order on March 21 addressing the company’s late filings and issued new strict deadlines. Standard & Poor’s as of May 8 had a “B-” rating on Phoenix with a negative outlook. A.M. Best in August downgraded the Phoenix Companies’ subsidiaries, dropping their financial strength ratings to “B” (fair) from “B+” (good) and issuer credit ratings to “bb+” from “bbb-”. All of the company’s ratings are below investment grade. As of May 7, its share price was down 23.4% since the first of the year, according to InvestorPlace.com.
“It’s incredible—scary,” says Wagner, one of the only principals interviewed for this article who was aware of the company’s problems. “Wouldn’t that financial advisor advising someone to go into that company’s products have some fiduciary concerns? Maybe? There could be potential fiduciary liability certainly.” Wagner cautions about using third-party experts, too. “They’re only as good as their expertise. Check their qualifications, previous recommendations, years in the industry, costs-to-benefit. Do a prudent investigation.” Apparently there’s no getting rid of fiduciary liability. Says Wagner, “It can and will come back ... the fiduciary boomerang.”
There is still another type of annuity request advisors are getting—clients looking for valuations of existing annuities in light of their current situations. Here, Stephen Esposito, who works directly with fee-only fiduciary advisors and planners, assists clients as part of Parsippany, N.J.-based Macro Consulting’s year-old annuity review program. Nearly 90% of the benefits Esposito fields questions about involve guaranteed withdrawal benefits. Macro has gotten inquiries from more than 150 advisors to date asking about variable annuities, which he calls very complex products.
Some inside advice: Esposito says the insurers could afford to be much more generous before the financial crisis. So most of the older or legacy annuities are better than today’s. “After 2008, insurance companies started pulling back on the attractiveness of guarantees. So a lot of older contracts—2010 or earlier—are very difficult to replicate today.”
His fee is $399 for a consultation, which is good for up to two contracts. After that it’s $99 for each additional call. Advisors shouldn’t be embarrassed to ask, Esposito says. Even CFPs who have already bought annuities for their own use have called him after the fact for clarification on some of the finer points. And advice might even help advisors avoid a lawsuit for failure to exercise fiduciary due diligence.