Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.
Annuities can be structured to provide fixed periodic payments to the annuitant or variable payments. The intent of variable annuities is to allow the annuitant to receive greater payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund's investments.
That's an annuity. Picking up the story, written by Bloomberg's reporter Martha Collins:
The different ways in which annuities can be structured provide individuals seeking annuities the flexibility to construct an annuity contract that will best meet their needs. President Barack Obama on Feb. 1 called for a change in government rules to allow adding annuities to 401(k) retirement plans. While the annuities offer a steady stream of income in exchange for upfront payments, the price for peace of mind may be higher fees and less access to cash.
“You’re paying for a benefit that you may or may not use,” said Glenn Daily, a fee-only insurance consultant, referring to annuities. “These things are so complicated I doubt many people will understand what they’re buying.”
MetLife Inc. and Prudential Financial Inc., the two largest U.S. life insurers, are aiming to tap into what may become a $1 trillion market by blending annuities with target-date 401(k) funds, which shift to more conservative assets such as bonds as an investor nears retirement. The funds were used as the default investment by 87 percent of retirement plans in 2008 with automatic enrollment, according to Vanguard Group Inc.
Insurers are working with mutual-fund companies to build the guarantees into 401(k) funds because state laws require an insurance charter to sell annuities.
The income guarantee that insurers and mutual-fund companies are developing lets workers pay for an annuity in installments using their regular contributions to retirement accounts, said Garth Bernard, chief executive officer of the Boston-based Sharper Financial Group, which specializes in retirement income solutions for financial companies.
Fund Scrutiny
Legislators have scrutinized target-date funds because some lost as much as 41 percent in 2008. The funds attracted $45 billion last year, up from $28.7 billion in 2006, according to Chicago-based Morningstar Inc.
“It’s a huge market,” said Tom Johnson, senior vice president in New York Life Insurance Co.’s retirement income security business, of the potential for annuity/retirement accounts. Americans held $6.8 trillion in 401(k) plans and IRAs as of September 2009, according to the Investment Company Institute, a Washington-based mutual fund trade group. If 15 percent of those assets went to guarantees, it could mean more than $1 trillion for insurers, Johnson said.
“We believe guaranteed income is important because it locks in a level of retirement income,” said Jamie Kalamarides, senior vice president of retirement solutions for Prudential, based in Newark, New Jersey. “Most Americans aren’t saving enough.”
Prudential, MetLife
Prudential and MetLife have already introduced income guarantees designed for target-date funds. Investment-management firm BlackRock Inc. is offering to employers a target-date fund with a MetLife annuity as the fixed-income component, said Kristi Mitchem, head of New York-based BlackRock’s U.S. defined contribution.
Asset manager AllianceBernstein Holding LP is working on a similar product with multiple insurers including Axa SA, while Putnam Investments LLC expects to announce a lifetime income benefit for its 401(k) funds this year, the companies said.
Fidelity Investments, the largest target-date fund provider, offers employers a 401(k) fund with an annuity through insurer Genworth Financial Inc., said Michael Doshier, vice president of the Boston-based company’s workplace investing group. Vanguard is also exploring income stream options within its retirement plans, said spokeswoman Linda Wolohan.
Two Forms
The types of guarantees being developed vary and have trade-offs, said Bernard of Sharper Financial. One type has relatively high fees and another prevents retirees from liquidating their savings once they start receiving monthly income, he said.
Annuities and guaranteed income benefits in retirement plans can be an important safeguard against outliving savings as more Americans fund their own retirement, said Moshe Milevsky, a finance professor at York University in Toronto. Combining them with target-date funds is a concern, he said.
“Let’s not get carried away,” said Milevsky, who specializes in insurance. “To say that we are going to lever these guarantees on top of target-date funds that have not been fully tested yet, I’d be wary.” The Department of Labor endorsed target-date funds as a default investment option for employers in 2007.
The Treasury and Labor departments started reviewing public comments this month on how to make it easier to convert savings into lifetime income streams.
Government Guidance
“Many plan sponsors would like explicit guidance from regulators,” said Tom Idzorek, chief investment officer at Ibbotson Associates, a unit of Morningstar. A government endorsement would create “a rush of sponsors trying to add these to plans,” he said.
Last year, 4 percent of employers offered a plan that allowed participants to allocate a portion of contributions to an income guarantee, according to Callan Associates Inc., which surveyed 90 plan sponsors with more than $100 million in assets. The previous year, the total was 3 percent. Employers are concerned about cost, portability and how to pick an insurance provider, said Lori Lucas, defined contribution practice leader for the San Francisco-based investment-consulting firm.
Annual fees for guarantees in 401(k)s can be 95 basis points or more above the retirement plan’s investment-management fees, she said. A basis point is 0.01 percentage point.
“Those fees may reduce account values by 7 percent to 9 percent over 10 years,” said Drew Denning, vice president of retirement and investor services at Principal Financial Group Inc. The Des Moines-based firm, the fourth-largest provider of target-date funds, recommends investors wait until retirement, when they know their financial circumstances, before deciding to shift a portion of their savings to an annuity, Denning said.
Switching Insurers
Employers also are concerned that guarantees will prevent employees from exiting their retirement plans if they transfer jobs, said John Carl, president of the New York-based Retirement Learning Center, which consults plan sponsors.
“The portability of these contracts at this juncture is minimal between insurers,” Carl said. “You’re essentially locked into the program you choose -- or are defaulted into.”
That’s because an insurer calculates its annuity payments based in part on the life expectancy of a pool of individuals holding such contracts, which makes it harder to switch from one insurer to another, Carl said.
Solvency of the offering company is another impediment, said Robert Toth, an attorney who specializes in retirement plan products and services.
“How do you make a decision that the insurance company will still be here 30 years from now?” said Toth, who is based in Fort Wayne, Indiana. “Employers fear making that choice and being responsible.”
Longevity Insurance
Longevity insurance, another type of income guarantee, may be a better, cheaper option for protecting against outliving savings, said Daily, the New York-based insurance consultant. Longevity insurance guarantees future monthly income typically around age 80 and may be less expensive because “you’re only buying the tail end” of the benefit, Daily said.
“Why should you take the plunge now instead of waiting?” said Daily. “Some of these guarantees are so hard to value that you have to be an economist to figure it out.”
That's a balanced article and I compliment Ms. Collins for presenting it that way.
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