Variable annuity providers hope to jump-start their business by selling security to worried baby boomers.
What is the number one financial fear for baby
boomers? Outliving their money in retirement, according to a June
survey by The Hartford.
The $1.2 trillion variable annuities industry is using this type of feedback to create a spate of lifetime income guarantees and market growth riders, so that boomers can rest assured they'll never run out of money. Executives hope the new products will propel the industry out of its five-year sales rut.
"A lot of people have started buying these guaranteed options," says Mike DeGeorge, general counsel of the National Association of Variable Annuities (NAVA), in Reston, Va. By the third quarter of 2005, more than 85% of the variable annuities that were sold offered a guaranteed minimum withdrawal benefit. Sales were up only 3.7% through third quarter 2005, the most recent figures available, NAVA reports.
While variable annuities have traditionally been marketed to people who want to be able to capitalize on and defer stock market gains, "A lot of investors are leery of the market after the downturn in 2000 and 2001," says DeGeorge. "At the same time, they realize they need equities exposure to generate income for their lifetimes. This new generation of products offers the best of both worlds."
The cost for such lifetime income riders ranges from 0.40% to 1%. That brings the total cost of annuities into the 2.35% to 2.70% range, according to Morningstar. While advisors admit that more clients are clamoring for the ability to guarantee at least enough income to pay monthly household expenses, some are still reluctant to lock clients into long-term contracts, especially in a low-rate environment.
Add to that a raft of compliance issues that have prompted concern from broker-dealers about full disclosure and this product, which addresses several financial planning problems at once, has faced its share of headwinds. Executives acknowledge that some advisors have been slow to buy variable annuities, but say they are pouring considerable resources into educating advisors and registered representatives about the latest generation of products and what they can do for clients in terms of income guarantees and market growth potential.
The latest generation of retail variable annuity from Genworth Financial, called RetirementAnswer, offers both equity growth and a guaranteed rate of return. Genworth provides a guaranteed monthly payout with its retail variable annuity product, "so on the day you purchase the contract, you know what your guaranteed income is as of your retirement date," says William S. White, vice president of business intelligence at Genworth Financial in Richmond, Va. "If the market outperforms, you keep all the upside."
In the past, products were designed to delay payouts, say for three years, but RetirementAnswer allows investors to begin taking payouts immediately. "Advisors said, 'Look, I have a 70-year-old client who wants to start taking withdrawals now. With this product, they can do that at a guaranteed rate of 7%," White says. A low-cost variable annuity paying 7% for life, with a death benefit equal to the initial contract amount, may be harder and harder to beat, especially for clients 70 and older.
White says he believes these product guarantees are beginning to resonate with advisors and investors. "When you talk to an advisor in Detroit and they say, 'You know, I have a client who is working with GM and we just don't know what will happen with his pension,' we say, 'Take a lump-sum rollover and put it in our annuity, where your client can have a guarantee.' There are only three places where you can get that kind of guarantee: an annuity, Social Security and a defined benefit plan. And with defined benefit plans, you can count the number that are fully funded on one hand," White says.
The fact that fee-only advisors do needs-based planning for investors may only serve to underscore clients' desire for reliable monthly household income, he adds. "When your client sits down and says, 'These are my needs: home, taxes, insurance, car, utilities. How are we going to pay them?' then my question for advisors is, how will you guarantee your clients' needs are met in retirement?'" To help educate advisors, Genworth is holding retirement income summits throughout the country and a financial symposium in Washington, D.C., in May.
The Hartford, in Simsbury, Conn., rolled out its Lifetime Income Builder in November. The rider, which costs about 40 basis points, "guarantees a base amount of income, regardless of how long you live, and includes upside increases if the market performs well," says Scott Sanderson, the Hartford's vice president of marketing and strategic accounts.
Lifetime Income Builder guarantees a 60-year-old a 5% return for life. The company also plans to come out with longevity insurance this year. "We all underestimated the ability of these kinds of guarantees to resonate with boomers," says Sanderson. "Frankly, these folks will be the most sophisticated consumers in history. They'll ask all the tough questions about benefits and costs."
Costs will come down and pricing will get more transparent, he predicts. "We like transparent pricing," he says. "In the mutual fund industry, for example, we see cost becoming increasingly important. That excites us, because as the largest industry player, we have the scale to deliver value."
But the cost of providing a lifetime income isn't cheap when life expectancy rates continue to rise, which helps explain why so many Fortune 500 are rushing to terminate their traditional pension plans. Sanderson says that the average cost of The Hartford's variable annuities comes in at around 2.27% and compares favorably with the cost of wrap accounts for small investors, which don't have lifetime income guarantees.
To help advisors master variable annuities, The Hartford is introducing a multifaceted campaign this year, including adding 15 new retirement specialists across the country, whose primary job is to answer advisors' questions with regard to retirement planning needs. The company is adding a Web-based tool this year that will allow advisors to look holistically at clients' assets and needs, and how those needs can be met across categories.
The company has also come up with a "Balance and Perspective" presentation of its products. "This provides an objective and neutral look at what products an advisor is recommending," Sanderson says. "So far, it's been well-received in meetings. I think it's very refreshing for them to hear from a product provider about not only the benefits of a product, but also some of the downsides." For instance, Sanderson says, the new presentation would tell a 40-year-old who needed to earmark all of his funds for non-retirement purposes not to buy a variable annuity, since he essentially wouldn't be able to access the funds until age 59.5. "I think from a compliance standpoint, this has to be a partnership between carriers and distributors. We have to be able to tell advisors, so they can tell their clients this is how these work and how they fit and, just as importantly, this is how they don't work and won't fit."
Compliance issues, especially suitability, continued to dog the industry in last year. The National Association of Securities Dealers filed 88 cases against firms in 2005 and settled a major enforcement action against Waddell & Reed, a broker-dealer in Overland Park, Kan. The firm agreed to pay a $5 million fine and $11 million in restitution to injured customers for engaging in a campaign to exchange the variable annuity contracts of thousands of customers without regard to the suitability of those switches.
Sanderson says he believes ever-greater scrutiny and better tools will help minimize suitability issues. He also predicts that better products and the growing needs of boomers will drive sales. "If we're having this discussion about stagnant growth three or four years from now, the variable annuities industry will have been a dismal failure," he says.
In its own bid to give boomers greater income comfort in retirement, AIG SunAmerica's Retirement Markets introduced its MarketLock product last year. It automatically locks in investment gains on the anniversary date of the contract, which helps investors create a better stream of income that can only increase with the market. "We spent a lot of time looking at what's important to investors," says Rob Scheinerman, senior vice president of AIG SunAmerica Retirement Markets. "They want to make sure they don't miss out on the benefits they've bought, but also want to lock in gains. Investors get to participate in equities, but don't have to worry about losses."
The cost of the MarketLock rider is 65 basis points. If an investor locks in $100,000 and the underlying investments in the annuity grow to $108,000 at the investor's anniversary date, $108,000 would be the new guaranteed amount. The rider allows investors to take 5% monthly withdrawals for the first five years of the contract, starting at any age, 7% withdrawals between the fifth and tenth anniversary and 10% every year after.
As the market goes up, "we'll lock in a new guaranteed level at the new dollar amount," Scheinerman says. A lifetime income benefit rider is in development at AIG SunAmerica.
"The big fear right now is retiring at the wrong time and the market takes a downturn," he adds. "We want to make sure our products eliminate those fears for investors."