Date posted: January 24, 2015
As we near the end of January (can you believe it?), people are already starting to look at the forecasted annuity trends for 2015 to see what is proving to be true. In LifeHealthPro’s article, “Annuity trends: 2015 and beyond,” Adam Cufr took a look at the recent past and predicted future of the annuity industry. As the economy went through some drastic changes between 2008 and 2014, annuities had to quickly adapt to these changes. The main purpose of annuity products is to protect people from longevity risk and market risk. These risks have become an increasing liability for the companies selling annuities because both risks have intensified in the recent past. People are living longer, which increases longevity risk. More volatile markets have increased the market risk for insurers selling annuities.
The steep stock market decline in 2008 was the catalyst that changed the variable annuity marketplace. Before that crash, bigger and better variable annuities were hitting the market every month. Although variable annuity products still hold the largest piece of the annuity market share, the products have changed dramatically. More of the variable annuities being sold now are those with living benefits, especially income riders. This benefit is the same reason that fixed indexed annuity products have seen an increasing market share in the past few years. Even though interest rates are historically low, advisors and clients like indexed annuities for the living income benefits that they offer.
Insurance companies have run into problems with variable annuities because they have to contend with both longevity and market risk. In order to remain profitable, they’ve had to change pricing and lower income account rollups and payouts. In the future, experts predict more variable annuity product changes. ETF-based variable annuities with lower costs are likely to become more mainstream. The income benefits offered with these products could actually be better than the high fee variable annuities that have subaccounts similar to mutual funds. Another big change likely coming to the annuity market is the elimination of the annuity that supposedly “does it all.” Indexed annuities are going to be positioned either as a CD alternative to use for accumulation or an income generator used for its guaranteed lifetime income stream.
One of the biggest changes happening in the annuity marketplace, however, is the predicted increasing use of annuities in retirement plans. Recent legislation has made annuities easier to use in defined contribution plans so that Americans can create a lifetime income stream. Retirement plans offering annuity products will make no difference if there is not a shift in the mindset of workers who have retirement plans. In Robert C. Merton’s Harvard Business Review retirement piece, “The Crisis in Retirement Planning,” he says that retirement plan sponsors should ask employees what their income needs will be in retirement before asking anything else. Once retirement income needs are established, the right annuity product to meet these needs can be chosen. Variable, fixed and indexed annuities all meet different needs for people. It is the job of a reputable advisor to match an individual’s objectives with the benefits of a particular annuity product. Each annuity type is constantly evolving to meet the needs of both the clients purchasing them and insurance companies selling them.
Date posted: January 22, 2015
Yesterday’s blog post listed some of the reasons why annuities are not in many defined contribution plans and why they are likely to be offered in many more plans in the future. Jean Chatzky agrees with this and believes that longevity annuities are going to take off this year. In a recent Fortune Magazine article, she explained “Why 2015 is the year for longevity annuities.” The Employee Benefit Research Institute’s 2014 Retirement Confidence Survey found that only 18% of workers are very confident that they will have enough money to live a comfortable retirement. That’s a staggering figure, but one that has kicked the insurance industry in high gear to come up with a solution for retirees.
The insurance industry’s solution to this demand for a comfortable retirement is longevity annuities. These deferred annuities are fairly simple. You receive guaranteed income payments in the future after paying an insurance company a lump sum at purchase. Longevity annuities have been around for about ten years, but their increasing importance and popularity in 2015 can be attributed to recent government regulation changes. Retirees used to be required to take minimum distributions from their 401k and IRA plans starting at age 70 1/2. New Treasury Department regulations have increased this age to 85 when longevity annuities are purchased inside of 401k and IRA plans.
AIG was the first company to tweak their annuity product so that it meets the new regulations for use inside of defined contribution plans. The Forbes article says to expect new products from Mass Mutual, New York Life and Guardian this year as well. Although longevity annuities currently represent only about 2% of total annuity sales, annuities expert Stan Haithcock believes that longevity annuities will be the top annuity product in the next five years.
The new regulations, and longevity annuities in general, are simple to explain. This is partly because indexed and variable annuities, the more complex types, do not qualify for these regulations. You can use up to 25% of your 401k or IRA balance, or a maximum of $125,000, to purchase a longevity annuity. This money can be deferred much longer than the other money in the account that requires minimum distributions when you are 70 1/2. Your monthly payments are based off of when you start receiving income. The longer your defer payments, the higher those payments will be. There is always the possibility that you will die before receiving your income, so you can have the annuity set up to pay 100% of your premium to beneficiaries if that is a concern of yours.
Mr. Haithcock pointed out that the two major downsides to using these products are flexibility and liquidity. Once you make the decision to purchase a longevity annuity with some of your savings, the money stays there. That is why the government put the limit on how much you can use to purchase an annuity within your plan. Some people also wonder if you can create income better on your own than you can with an annuity. The problem with this is that nothing is guaranteed. There is certainly the possibility that you can get more income by taking your own withdrawals of income, but there is also a good chance that you might outlive your savings. If you have questions about using longevity annuities in your retirement planning, an expert financial advisor can help in your planning.
Date posted: January 21, 2015
Those workers lucky enough to have a pension plan from their employer receive a stream of income payments during retirement that will last as long as they live. Most workers, however, have defined contribution plans like 401ks instead of pensions. The majority of 401k plans don’t have annuities within them, despite many experts touting the necessity of annuities within defined contribution plans. This leaves the task of creating lifetime income to the employee and this task can be daunting. Andrea Coombes researched “Why you don’t (yet) have an annuity in your 401 (k)” for her Marketwatch article.
Consulting firm Towers Watson recently researched workplace retirement plans and found that only 12% of medium and large sized employers offer some type of lifetime income option within their retirement plans. The surveyed companies that offer a lifetime income option had three choices available. Only 9% allowed the employee to roll their savings into a traditional company pension while 18% offered employees help purchasing an outside annuity with their retirement savings. But 73% of the companies offered an annuity within the retirement plan. Last year’s Treasury rulings are likely to increase the percentage of companies offering a lifetime income option within their defined contribution plans.
The first ruling allows for easier use of Qualified Longevity Annuity Contracts (QLAC) within retirement plans. These deferred income annuities, also known as longevity annuities, help ensure that you don’t run out of money late in life when it would be hard to earn income. The other Treasury ruling made it easier to use annuities within target-date funds to help provide income throughout retirement. AIG has already made changes to one of their annuities so that it complies with the new guidelines. The annuity industry is likely to introduce many more products this year that comply with the Treasury guidelines. The article points out that these changes will occur slowly and the industry still has to work to change some retirees’ perceptions of annuity products.
One of the biggest roadblocks keeping employers from offering annuities in retirement plans is their concern over fiduciary responsibility. They have been lobbying the Labor Department to come up with a safe harbor to keep them from getting sued in case something happens with the insurance company providing the annuity payments. Towers Watson found that 41% of employers listed fiduciary risk as the reason they don’t offer lifetime income options within their retirement plans. Financial expert Steve Vernon says that ERISA lawyers think that the fiduciary risk argument is overblown and that employers are safe as long as they can demonstrate that they went through a thoughtful process when choosing their plans. The Institutional Retirement Income Council hopes that the government will provide employers a safe harbor for offering lifetime income options in retirement plans just like they did for target-date funds with the Pension Protection Act of 2006.
Annuities certainly offer a lot of benefits to retirees, but there are challenges associated with using them as well. Forty-one percent of the companies surveyed said that “administrative complexity” keeps them from offering annuities within their retirement plans. Employers worry about the costs and their ability to switch record-keepers if the same annuity is not offered elsewhere. Another issue is that employee participation is low for the companies that do offer annuities as lifetime income options in their 401k plans. Insurance companies argue that employers need to better educate employees on the benefits of annuities. The issue might be that they don’t know enough about annuities to ask for this solution for their retirement income needs. There is still a lot of work to be done before annuities become mainstream in retirement plans, but their potential as an income stream solution is obvious.
Date posted: January 16, 2015
Fixed annuity sales have been down overall recently. This includes sales of fixed indexed annuities, but lower sales aren’t necessarily telling the whole story for fixed indexed annuity products. According to Insurance News Net’s “3Q FIA Market Share Highest In 5 Years,” Linda Koco points out that increasing market share tells a lot about the actual state of the fixed indexed annuity market. Beacon Research found that fixed indexed annuity sales accounted for 53.8% of total fixed annuity sales during the third quarter of 2014. This was the highest market share that fixed indexed annuities have seen in any third quarter since 2010.
Indexed annuity sales decreased 9.6% from the second quarter to the third quarter last year. But the sales of $11.7 billion were actually an increase of 34.5% from the third quarter two years ago. The third quarter of 2012 is the last time that the fixed indexed annuity market share was close to what it is now. Having a larger market share means something important, especially in an industry like that of fixed annuities where overall sales have declined. Fixed indexed annuity market share hit the highest level in 5 years during the 3rd quarter of 2014. When you compare the sales and market share during the 2nd quarter of 2014 and the 3rd quarter of 2013, the article says that fixed indexed annuities are holding their own despite the large fixed annuity sales decline from the 2nd to the 3rd quarters of last year. Sales and market share increased significantly from the 3rd quarter of 2013 to the 3rd quarter of 2014. This is likely because consumers appreciate the downside protection combined with upside potential offered by fixed indexed annuities.
Insurance News Net’s article includes an interesting chart that compares the different types of fixed annuity products’ market share from 2010-2014. Fixed indexed annuities and income annuities were the two products with significant increases in market share, 22.3% and 23.28% respectively. Although income annuities had a higher market share increase, their sales are still significantly lower than those of fixed indexed annuities. Increasing interest in deferred income annuities will likely lead to income annuity products taking over even more of the fixed annuity market share in the future. Market value annuity share increased by 11% overall during the five year time frame. Book value annuity market share declined by 38.1% because of the continuing low interest rate economic environment. It’s important to look at not only annuity sales, but also the market share of different types of annuities when making product comparisons.
Date posted: January 14, 2015
We posted a few blogs on the important regulation changes last summer allowing greater use of Qualified Longevity Annuity Contracts in 401k plans. There was some other important regulation last year in regards to annuity products that had to do with the use of annuities and target-date funds. Target-date mutual funds that are within 401k plans can now include an annuity feature that will provide guaranteed lifetime income during your retirement. This information comes from Money’s article “This New Retirement Income Solution May Be Headed for Your 401(k),” by Dan Kadlec. The IRS and Treasury Department made this ruling last November, just four months after their ruling regarding the use of QLAC’s in defined contribution plans.
The government certainly realizes the importance of creating a lifetime income stream during retirement that you cannot outlive. While Social Security and employer pensions are great sources of retirement income, pensions do not reach everyone and Social Security typically does not pay enough income to meet monthly living expenses. The government now allows plan sponsors to make target-date mutual funds tied to annuities the default option in their 401k plans. If your employer makes this their default, you would have to proactively opt out of such a plan if you didn’t want to participate. The IRS and Treasury Department now allow target-date mutual funds to be invested into fixed annuities, both immediate and deferred.
Target-date mutual funds have skyrocketed in both popularity and importance over the past two decades because of their innovation. These products shift your money automatically from a less conservative asset allocation to a more conservative one as you get older. When you are young, around 90% of your money is invested in stocks. By the time you reach age 65, the percentage of your money invested in stocks has decreased to around 50%. Target-date funds have become staples in 401k plans because of their simplistic diversification and asset allocation approaches. Currently, close to half of 401k money goes into target-date funds. One estimate says that figure will rise to 63% by 2018. Vanguard predicts that 80% of their new plan participants in 2018 will put all of their money into target-date funds.
While target-date funds have been an important part of 401k plans, there was still a missing part of the equation: turning the money into a stream of income. Now that the government has made it possible for target-date funds to be tied to fixed annuity, these funds are likely to become even more popular. During your working years and into retirement, target-date funds can now transfer your assets from stocks to bonds to income. An annuity feature allows for an automatic switch to income that helps ensure that you can pay your monthly bills and avoid running out of money during retirement. There are still a few issues to be worked out when it comes to including annuities in 401k plans, which is why it has taken so long for the government to take action. But with workers seeking out a guaranteed lifetime income stream in retirement and the federal government making it easier for annuities to be used in 401k plans, target-date funds with an annuity feature are likely the way of the future.