Date posted: January 28, 2015
The Insured Retirement Institute released their State of the Industry report last month. The report offers insight into the overall annuity market for 2015 as well as a prediction that interest rates will rise above 3% this year. In Think Advisor’s article, “Fixed Indexed Annuities to Hold ‘Bright Spot’ in 2015,” Melanie Waddell says that annuity purchases will continue to shift to products that offer principal protection and income streams for the future. The IRI believes that an increase in interest rates later in the year will lead to significant innovations and focus on variable annuities once again. But as of now, fixed indexed annuities will remain a focus in the annuity industry. Baby Boomers are facing their retirement realities head on and are searching for principal and income guarantees.
Growth has been strong for fixed indexed annuities, immediate annuities and deferred income annuities. Part of this growth can be attributed to public policy changes, especially when it comes to DIAs. Indexed annuities have their own reasons for growth in the past couple of years. Their principal protection paired with growth potential make fixed indexed annuities an important solution for the accumulation phase of retirement planning. Many people have been using them as an alternative to CDs in their planning. The income stream that you receive from fixed indexed annuities is both reliable and efficient and some experts tout these annuities as being the closest product to recession-proof that you can get. Indexed annuities offer a guaranteed minimum surrender value throughout the contract and defer taxes on interest earned until you start receiving withdrawals.
The IRI’s president and CEO says that there is a huge opportunity for the insured retirement industry to innovate and meet the changing demands of Americans who are facing retirement income challenges. There was not significant growth in the industry during 2013 and 2014, as sales shifted from variable annuities into other annuity product types. Fixed annuity sales increased significantly from 2013 to 2014, while variable annuity sales were pretty flat. Variable annuity assets did reach an all time high during the 3rd quarter of last year though. Overall annuity sales are expected to increase 3-5% for 2014 as a whole though. Deferred income annuity sales are likely to continue their significant increase during 2015, especially because of recent Treasury Department rulings and an increase in companies selling the products. There are a few more annuity regulations to watch in the coming year that could affect annuity sales and trends as well. The Department of Labor and the Treasury Department are both working on the finalization of new policy details.
Date posted: January 26, 2015
LIMRA’s Secure Retirement Institute recently asked workers with defined contribution plans where annuities fit into their future retirement financing. Insurance News Net’s Linda Koco summarized the results in her article “Where Do Annuities Fit In?“ Workers were asked where they expect their retirement income to come from and annuities ranked last on their list. More than 3/4 of workers in both the private and not-for-profit sectors expect some of their retirement income to come from their defined contribution plans. Annuities fell on the other end of the spectrum. Only 14% of private sector workers and 13% of not-for-profit workers expect some of their retirement income to come from annuities. The other expected sources between the highest and lowest were Social Security, savings accounts, IRAs, part or full time work and pensions.
The question that annuity professionals need to ask is why there is such a gap between expected income from annuities and expected income from defined contribution plans. In the private sector, 77% of employees are saving for retirement using their company’s defined contribution plan. It’s a little lower in the not-for-profit sector where 73% of employees save using the company plan. The anticipated increase in defined contribution plans offering annuities to provide a lifetime income stream will probably increase the number of workers who expect some of their retirement income to come from annuity products. The industry anticipates this increase after regulation changes last year made it easier to offer annuities within defined contribution plans.
When workers put money into a workplace retirement plan, they are constantly reminded through paycheck stubs, employer notices and even questions from coworkers about their retirement plans. People don’t usually receive those kinds of reminders with annuity products, so they simply might not be at the forefront of people’s minds. Another reason that defined contribution plan participants aren’t thinking about annuity products is their demographic. The majority of those questioned said that they were not “very knowledgeable” about financial products or investments. But almost 60% of those in the private sector believe that a financial professional can help them add more value to their financial plan than they can add on their own. There is a definite need for annuity professionals to spread knowledge about their ability to create lifetime income during retirement. Since more than 2/3 of respondents have little to no risk tolerance, fixed annuities could be the right product for their financial plan. It’s important for the annuity industry to educate consumers, especially those participating in defined contribution plans, and bridge the gap between expected annuity income and DC plan income for retirement.
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.