(Dow Jones) A new variable annuity will allow investors to build their portfolio by choosing subaccounts that invest in an increasingly popular class of investments: exchange-traded funds.
The Variable Annuity for Roll Over Only Money, or Varoom, appears to be the first to permit advisers and other investors to build a customized portfolio of subaccounts that invest directly in ETFs. As its name suggests, it is issued as an individual retirement account for tax-qualified rollovers only, for example, for money coming from a company 401(k).
Varoom was created by the Integrity Life Insurance Co. of Cincinnati, Ohio, and National Integrity Life Insurance Co. of Goshen, N.Y. The same companies that issued the first variable annuity with ETFs as an investment option in a fund-of funds structure in 2004. Both are part of Cincinnati-based Western & Southern Financial Group Inc.
The annuity, which will be issued as an IRA, becomes available Jan. 3. Designed for those who want to take an active role in investment decisions, it allows investors to choose among 18 individual ETFs from the Vanguard Group and iShares, which is owned by BlackRock Inc. (BLK), and a money-market fund as so-called subaccount options. The ETFs invest in a range of asset classes, including equity, fixed income, international and alternative investments. Charges for the funds range from 9 basis points to 50 basis points.
The annuity is available to investors up to age 80 who invest at least $25,000 and no more than $1 million. It will be distributed by Touchstone Securities Inc.
ETFs were selected with the aim to keeping costs low and allowing for diversification without too much complexity, said Mark Caner, president of W&S Financial Group Distributors Inc., Western & Southern's wholesale distribution subsidiary. At the same time, "we wanted it to be comprehensive enough for financial advisers to have enough to work with," he says.
Frank O'Connor, director of insurance solutions at Morningstar Inc., says the annuity appears to be unique in several ways. "The fact that the subaccounts are investing directly in ETFs is unique," he says. "Heretofore, we've only seen contract structures where ETFs are the underlying investment of a fund of funds." Lincoln Financial Group's (LNC) SSgA Global Tactical Allocation Fund, for example, invests in ETFs using a fund-of-funds structure.
The new annuity appears less costly than similar variable annuities which employ mutual funds, O'Connor says.
An annual separate account expense of 1.75% is applied to subaccount assets within Varoom. For an additional fee, the annuity offers a guaranteed lifetime withdrawal benefit, which ensures that an investor will receive a minimum annual lifetime payment if their withdrawals are limited to the guaranteed amount. This option increases the payout percentage by 0.1% each year that an investor doesn't make a withdrawal. Charges for the benefit are based on the account value, not the benefit base.
For annuity holders who can put off withdrawals, particularly those who buy in early, this option will prove beneficial, says O'Connor. Basing charges on the account's value rather than its benefit base isn't unique, but it is unusual and beneficial for investors, he says.
The annual rider charge is 0.60% of account value for investors who select a basic allocation model, a diversified portfolio of ETFs put together by the insurer; growth, blend and value models are available. The annual rider charge is 0.80% annually for those who wish to select their own investments within certain limits. The rider is available to investors between the ages of 45 and 80.
The annual rider charge of 0.60% to 0.80% is a bit lower than the average 1.04% for such a benefit, says O'Connor. He notes that those who choose to select their own subaccounts must invest within certain limits including placing at least 35% of their assets in fixed-income.
The total insurance charges for the contract and lifetime withdrawal benefit rider are 2.35% or 2.55%, though they could rise as high as 3.25% if hedging costs or other costs increase, the company says.
The total cost of the annuity is about 1% lower than the average B-share variable annuity with a lifetime guaranteed minimum withdrawal benefit, says O'Connor. That's due to the lower-than-average cost for Varoom's annual rider and its low-cost ETF investments, he said.
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