A Maturing Market
To other observers, though, VAs are simply a maturing industry going through growing pains. “A lot of variable-annuity carriers were caught in a situation with their guaranteed income benefits,” says Brad Johnson, vice president of marketing at Advisors Excel, a marketing and practice-management firm based in Topeka, Kan. “Essentially, they were mispriced. They had very high income benefits but the fees weren’t high enough.”
With less money going to VAs, the biggest gainer was indexed annuities, which saw a hefty annual sales increase. These are fixed annuities linked to a specific market index. Profits are typically locked in annually on the annuity anniversary. In terms of performance, they’re generally measured against CDs, not the stock market. Riders can be added, as they are on a VA, but the fees are invariably lower.
“With indexed annuities, you’re always going to have to price in longevity risk—they use the same actuarial tables as the VAs—but because most of the assets are put into bonds or some other guaranteed type of interest-rate vehicle, the companies don’t have to price market risk into their income guarantees,” explains Johnson.
New Features
Still, to keep customers and attract new ones, annuity issuers have been offering new enticements. “They will continue to innovate and look for new ways to provide clients with solutions that meet their needs,” says Elizabeth Forget, executive vice president of MetLife Retail Retirement and Wealth Solutions in Charlotte, N.C.
For example, a number of insurance companies are hawking low-cost investment-only VAs, which are stripped of expensive living-benefit riders. Others have developed new kinds of fixed annuities or innovative riders, such as MetLife’s own Guaranteed Income Builder. It’s a deferred-income annuity that allows clients to “cash out” and receive all or most of their purchase price back. DIAs have gained popularity since a 2014 U.S. Treasury Department ruling that allows retirees who use them in IRAs—in what are called Qualified Longevity Annuity Contracts—to defer a portion of their required minimum distributions (RMDs) and extend their tax deferment.
Another spin on RMDs comes from AXA Equitable. In April 2015, the company introduced the RMD Wealth Guard Guaranteed Minimum Death Benefit, a VA rider that allows retirees to lock in the total value of their annuity when they take their first required minimum withdrawal—and keep that value as a legacy for their heirs. “Even if you start depleting the actual account value, you’ve protected that locked in amount as a death benefit,” says Lucas of Integrated Financial Partners.
Lucas also points to a rider from American International Group (AIG) that allows retirees to withdraw as much as 7% a year. “That’s very aggressive by today’s standards,” he says. For clients who because of family history don’t expect to outlive their savings, it’s “a great way to maximize withdrawal benefits, minimize the use of capital and free other assets to be invested,” he says.
There are also new risk- or volatility-controlled indexed annuities. One example is Lincoln Financial’s OptiBlend, a “flexible premium deferred fixed-indexed annuity introduced last year that provides a choice of allocating to a risk-controlled indexed account with a low spread, a fixed account and traditional indexed accounts,” says Lincoln’s Herr. “FIA products with risk-controlled indexes have captured nearly 25% of the market in 2015.”
Keeping Track Of New Products
The only potential downside of all these new options is that they make for a complex market. “Where there used to be a lot of similarities across the products, there are now many nuances,” observes Lucas. “Five years ago you could just pick one you liked off the shelf. Now we’re in a world where each of these companies, in order to attract business, tries to offer riders and benefits that are different, unique.”
But this variety shouldn’t scare advisors away. “Yes, there are more or different options than in the past. There is better investment selection than ever, some offer alternative-type investments, and better allocation models,” says Bryan Kuskie, an advisor at Cantella & Co. in Clarksburg, Md. “Annuities are now more geared towards lifetime income planning, [which] helps fill retiring baby boomers’ needs.”
Murdoch at Somerset Wealth Strategies sees it another way. “I actually feel the products have become less complex and more commoditized,” he says. “There used to be products where you had an actuarial advantage against the insurance company because of the mispricings that existed. Now everything comes down to withdrawal style, with just nuances in the withdrawal and growth rates.”
Rising Interest Rates
At any rate, a rise in interest rates would likely benefit annuity sales. “A rising rate environment is a great positive for insurance companies because it improves their overall profitability,” says Michael Salley of Salley Wealth Advisors Group in Summerville, S.C. “As this unfolds, I am hopeful that the stronger companies begin to reduce the fees charged for riders, M&E [“mortality and expense” fees that cover guarantees, administration and commissions], surrender charges, etc. A less-expensive product should attract more investors and increase demand.”
Forget at MetLife agrees. “If and when rates rise, clients may have more interest in fixed-rate and income annuities, as credited rates and payouts would increase,” she says. “Clients might also favor annuities when looking at the conservative portion of their retirement portfolio.”
A different rate environment might require some different annuity choices, however. “You will have to use different subaccounts to manage rising rates,” says Kuskie.
One thing is clear: Reports of annuities’ demise have been greatly exaggerated. “Studies continue to show that Americans are deeply concerned about running out of money in retirement—a worry that’s driven by increasing life spans, the fact that fewer and fewer employers are offering defined benefit retirement plans and potential challenges for Social Security in the years ahead,” notes Forget. “Annuities are the only private source of guaranteed income for most Americans, and we believe they will continue to play an integral role in retirement planning.”