Annuity FYI Blog

The 401k annuity looks like the best bet for retirees to replace the pension income that generations before them counted on in retirement.  Fox Business published an article about this by Jennie Phipps entitled “Annuities the Next Big Retirement Option?”  After a government inquiry about the interest of using annuities in 401k plans last year, it seems like a consensus that this is going to be the way to help finance the retirement of many Americans.  Of course insurance companies are an advocate for using a 401k annuity to cover living expenses in retirement.  But the government and employers are also standing behind the investments.  While there are a lot of people on board with annuities, employees are often the ones most wary of the products.  They worry that they have to trust their money to someone else and give up all control.

There are around 6,000 different 401k plans using Prudential’s Income Flex plan.  Variable annuity reviews of the Income Flex say that the popularity comes from the minimum withdrawal benefit in combination with the potential for market upside gains.  All of the new annuity products out there are working to make improvements to give investors what they want.  There are more options, including more annuities where you can continue putting money in after the initial payment.  One of the largest issues that many people have with annuities is the concern over their security.  It is always important to purchase an annuity from a reputable insurer, but there are calls within the industry for some kind of government backed insurance, like the FDIC coverage for banks.  States do cover annuities, up to $300,000 depending on the state.  Some government insurance on annuities might help increase the popularity of the 401k annuity.

After a period of time where variable annuity products that were fee-based had a bad reputation, some of the biggest annuity companies are revamping the products.  Reuters Linda Stern discusses this new trend in her article “Analysis: New fee-only annuities aim to move upscale.”  More advisors are changing to fee-only practices now and insurance companies are making new products to attract them.  Retirement security has become more important than ever before during the past few years causing investors to change their willingness to pay more for better guarantees, like those offered with annuities.  More affluent investors tend to use fee-only advisors and they really appreciate the tax-deferral that comes with a variable annuity.

No-load, or fee-only, variable annuities are a very small portion of the total variable annuity market, but they are increasing yearly.  This year’s sales are expected to be 22% higher than sales in 2010.  Some of the big name companies introducing new fee-only variable annuity products include Allianz Life, AXA Equitable, Prudential, Lincoln National, and Sun Life.  In addition to the appeal of deferring taxes on all growth in the variable annuity, death benefits are another popular option for investors in these products.  Even fee-only variable annuities where you don’t pay commission are not right for everyone.  Depending on the mutual funds the annuities are tied to, your fees could be as much as commission on a basic variable annuity.  As with many annuities, getting past the preconceived notion the name carries can be the biggest hurdle for those who don’t understand all the benefits that come with a variable annuity.

Despite the work of the government and many insurers, the use of annuity products in retirement plans is not as common as it should be.  Daisy Maxey’s Market Watch article, “Annuities in retirement plans remain rare,” lists some of the options available to investors.  Many retirement plan administrators don’t think that the appetite is big for annuities, but BlackRock Inc. says that their research has shown increased interest from plan participants.

Prudential Financial offers IncomeFlex for defined contribution retirement plans.  The variable annuity was revamped in 2009 to meet changing demands from plan participants.  Investors receive a guaranteed lifetime payout of at least 5% starting at age 65, for a 1% yearly fee.  There are 7,000 different retirement plans offering Prudential’s product and over $500 million invested, an increase from last year of $200 million.  Fidelity has a program to help retirement plan investors create portfolios by analyzing their individual situation.  Some investors worry that 5 year fixed annuity and other annuity rates are fairly low now, but Fidelity can help investors understand the value these annuity products will bring them in retirement.

The U.S. Department of Labor has been looking into multiple regulations regarding annuity products and their use in 401k annuity plans.  Some retirement plan sponsors seek more regulation before introducing or expanding their 401k annuity offerings.  BlackRock Inc. and MetLife Inc. are working together on the LifePath Retirement Income Fund annuity, but would like more clarification from the government on their fiduciary responsibility offering 401k annuity products.  While annuity products are available for purchase by retirement plan participants, the industry is still working on making them more readily available to ensure guaranteed retirement income for investors.

Variable annuity demand has been increasing for over a year now, according to Bloomberg’s “U.S. Variable Annuity Sales Rise 24% Led By Prudential, MetLife.”  Noah Buhayar’s article says that variable annuity sales have increased for five straight quarters as the stock market has risen.  Prudential Financial and MetLife have led the way in variable annuity sales and their increases have helped the industry thrive.  Sales were up 24% from the first quarter of last year to the first quarter of this year.  Prudential sold $6.81 billion of the total $38.9 billion.  They were the top variable annuity seller and saw an increase of 40% from last year.  MetLife’s $5.68 billion in variable annuities was the second most sold and a 41% increase from last year.

Many changes are expected in the variable annuity industry, which could be one reason for the increase in sales.  Investors are trying to lock in guaranteed benefits like death benefits and guaranteed annuity rates for payouts before any changes occur.  Equity linked variable annuity products saw large sales as the stock market increased from its lows in March of 2009.  Last year the S & P 500 increased 13%, followed by a 5.4% increase in the first quarter of this year.  The stock market increase and a possible worry about increasing fees or changes in benefits are a good part of the reason for the variable annuity sales increase.

According to a company press release, Prudential Annuities has a new variable annuity product to offer investors.  The Prudential Premier Retirement variable annuity is being offered through Edward Jones, the financial services firm.  This product combines some of the best features from traditional A and B share variable annuities.  For instance, the higher your investment amount is, the lower your fees and charges will be.  Also, your initial payment will be immediately invested and you have the option to purchase Prudential’s Highest Daily Lifetime Benefit rider.  More than 92% of variable annuity investors with Prudential are opting for their living benefits to secure a retirement income guarantee.

Prudential’s senior vice president of Sales and Distribution said that this new variable annuity is not only meant to give clients greater flexibility and more choices, it is also meant to offer solutions to their annuity distributors’ various needs.  The annuity will be distributed through Edward Jones’ more than 12,000 financial advisors.  The companies have been working together to distribute annuities and life insurance since last September.  Prudential has doubled their sales in the past two years by including more distributors in their wholesaling force.  Their annuity sales go through four channels now including agencies, independent broker-dealers, wirehouse or regional firms, and financial institutions.