Morningstar surveyed the lifetime income landscape and identified seven distinct strategies that plan sponsors could offer to participants, which including drawing down from a conventional portfolio.
While the annuities industry has introduced a number of new products with a variety of bells and whistles over the past few years, fixed single-premium immediate annuities (SPIAs), variable SPIAs and deferred income annuities (DIAs) “still provide the most shortfall protection in cases where the portfolio-only strategy falls short of the retirement goal,” the analysis notes.
Strategies that involving using fixed single-premium annuities and dollar-cost averaging into deferred income annuities help retirees dampen market risk and longevity risk “and also tend to outperform bonds over longer time horizons due to mortality credits,” the report said. “Though variable SPIAs do not perform as well in bear markets, they hold their own in cases where the market performs reasonably well despite high inflation or despite the participant living a very long time.”
On the topic of bequests, Morningstar found that the qualified longevity annuity contracts and deferred variable annuities with guaranteed lifetime withdrawal benefit strategies perform the best alongside the portfolio-only strategy.
“These strategies provide participants with the most liquidity, meaning that in the event of an early death, a larger portion of the participant’s assets go to their beneficiaries. These strategies also enable a participant to participate in the market to a larger extent than the fixed SPIA and DIA strategies,” the authors found.
Morningstar also flagged the importance of adjusting asset allocations in other investment products after purchasing an annuity to optimize income and diversification.
The findings “provide rules of thumb and is an important starting point for advisors and investors, who each have different needs and risk tolerances,” Look says.
“Participants can benefit from personalized recommendations on what type of product to use and how much to allocate to the product, given their specific goals and preferences on income stability and bequests,” the study said.