Last year, according to data tracker Limra, U.S. annuity sales reached $385 billion, marking the second straight year of record highs. Limra attributed this sales run to a combination of rising interest rates, market volatility, demographic shifts and greater demand for retirement-income security.
All true, no doubt. But that’s only part of the story.
Industry experts point to a number of other developments in the evolution of annuities that are also driving unprecedented sales.
Guaranteed Lifetime Income
To be sure, macroeconomic trends are contributing to this surge. As the population ages, and post-earnings/retirement years grow longer, more people are worried about the possibility of outliving their savings. Not all annuities have lifetime income benefits, but the ones that do are the only products on the market that guarantee retirement income until death, which means they can help solve the problem of “longevity risk.”
“New research shows retirement savers are eyeing guaranteed lifetime income products,” says Whit Cornman, a spokesperson for the American Council of Life Insurers in Washington, D.C.
David Blanchett, the Lexington, Ky.-based head of retirement research at PGIM, the investment management group of Prudential, adds that increased interest in annuities is primarily “driven by the realization among advisors that you can’t solve retirement with a portfolio-only solution.”
Annuities, he says, can “do something a regular portfolio can’t, which is provide protected/guaranteed income for life.”
FIAs and RILAs
At the same time, however, insurance companies have been developing new types of annuities that many people find irresistible. The two biggest-selling types are:
• Fixed-index annuities (FIAs), which are fixed-rate annuities that track a market index and have total downside protection, meaning you cannot lose money. In exchange for that you have a cap on the upside potential, too; and
• Registered index-linked annuities (RILAs), which are variable annuities that give owners an even higher percentage of market gains in exchange for limiting the losses.
“RILA purchasers are typically seeking a product with less risk than a traditional [variable annuity] but more upside than a FIA,” says Jay Charles, director of annuity products at Luma Financial Technologies in New York City.
These products allow clients to “tailor a combination of protection levels … to meet their risk tolerance, individual investment style and retirement-income planning goals,” says Tim Seifert at Lincoln Financial Group in Radnor, Pa.
Registered index-linked annuities offer a broad variety of underlying investments and loss-protection levels. “That flexibility, combined with a volatile capital markets environment and growing need to protect retirement outcomes, are what have led to record sales,” says Scott Gaul at Prudential Financial in Shelton, Conn.
The appeal of these products is undeniable. “By allowing individuals to choose the amount of downside protection they are comfortable with, [annuities make clients] more likely to stay invested,” says Elle Switzer, director of annuity product management at TruStage in Madison, Wis. Because when clients don’t stay invested, she says, they start making emotional investing decisions, which can hurt their portfolio’s performance
These loss-protection annuities are designed for “clients who need downside protection from the market—those near or in retirement, or those with little risk appetite,” says David Lau of DPL Financial Partners in Louisville, Ky.
But these products are not the only innovations changing annuity markets, he says.
No-Commission Products
Another significant arrival is the commission-free annuity. Lau, who has made a career of specializing in these products, calls them “vastly superior” because they “significantly reduce product costs, often by as much as 80%.”
What’s more, he says, clients can get them from fiduciary, fee-only advisors, as opposed to insurance company sales reps, who take a cut of every sale and don’t have to service the client afterward. Though these products still represent a very small percentage of the overall market, zero-commission annuities have been gaining ground. Last year, DPL sold more than $2 billion of them, double its sales record in 2022.
Yet other financial experts aren’t convinced about the impact of these products.
Commissions Vs. AUM Fees
Jack Elder at CBS Brokerage, headquartered in Shakopee, Minn., contends that zero-commission annuities have no inherent advantages over commission products. The way annuities are sold, he says, doesn’t in the end affect their suitability for any particular client. What matters, he says, is what the product offers and what the client needs.
Moreover, he asserts that no-commission annuities aren’t necessarily cheaper in the long run. “Fee-only, no-commission products may cost the client more than a onetime commission,” he says.
If a client pays a 7% commission on a $100,000 annuity, he explains, the advisor or sales rep collects a onetime payment of $7,000. But if an annuity of the same value is sold on a commission-free basis by a fee-only advisor, the advisor may charge an annual fee of, say, 1% of assets under management—or $1,000 per year on that annuity alone. After eight years, the no-commission annuity would cost more than its commission-based counterpart, assuming the advisor charges an annual fee.
“Annuities are buy-and-hold assets,” he notes, “so it is safe to assume that most no-commission products will provide higher advisor compensation than onetime, commissionable products.”
Lau disputes this. “The consumer does not pay only once for the commission,” he says. “The broker gets paid once, up front, but the consumer pays through elevated fees [on the annuity itself] for as long as they own the product.”
Kameron McRay, a DPL vice president, adds that annuities without commissions “eliminate conflicts of interest.” Advisors aren’t motivated to sell them just to earn a commission, he says, but “to improve a client’s overall financial plan.”
The SECURE Act
Whatever the ultimate impact of commission-free annuities, there’s little doubt that 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act altered the playing field. The law allowed annuities into 401(k) retirement accounts, which “makes them more popular [and provides] easier access to them,” says Christopher Van Buren at LVW Advisors in Pittsford, N.Y.
That change could also introduce “the benefits of annuities to new segments of the population, many of whom may not otherwise consider them,” says Paula Nelson at Global Atlantic Financial Group in New York City.
Nevertheless, 401(k)s haven’t yet proved to be big sales drivers. But Kim Plyler at Jackson National in Franklin, Tenn., says this market should continue to grow “given the continued interest from plan sponsors, asset managers, and, most importantly, plan participants.”
All of these developments are certainly contributing to greater annuity awareness. “We’re seeing growing recognition across the board that the lifetime-income features offered by annuities are a great way to prepare for a more secure retirement,” says Rona Guymon of Nationwide Annuities in Scottsdale, Ariz.