Annuity FYI Blog

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.

While most people rely on the total 401k balance on their statements to plan their retirement, it is more important to know how that money will last by getting an annuity equivalent number.  The Lifetime Income Disclosure Act that Congress is researching would require the annuity equivalent number to be listed on 401k statements, according to Tim Grant of the Pittsburgh Post-Gazette.  His article, “Bill would require annuity data on 401(k) statements,” says that this annuity information actually gives the clearest picture on where you stand in your retirement planning.  The annuity equivalent is the amount of guaranteed lifetime income that retirees would receive at age 65 if they purchased an annuity with their entire 401k balance.

A New Mexico Senator said in the article that half of Americans will not have enough monthly retirement income to allow them to maintain their standard of living, and many Americans are not even aware of that fact.  He argues that this bill will let Americans know if they are saving enough to retire and maintain their lifestyle.  While the fixed annuity rates at the time the annuity is purchased will determine the exact monthly payout for each individual, the annuity equivalent number will give a good picture of the approximate monthly income retirees would receive if they purchased a fixed annuity with their 401k balance.  While the bill is still in the early stages, there are many bipartisan supporters as well as support from community organizations.  If the bill does pass, the Department of Labor will be in charge of issuing regulations to 401k providers.

New York State is the latest to issue legislation adopting the National Association of Insurance Commissioners’ guidelines.  Errol Baddoo of Annuity News Journal discusses the new regulations in “New York Insurance Department Changes Regulations.”  The New York State Insurance Department has two new regulations dealing with annuities and other insurance products.  Both are meant to protect consumers, especially senior citizens, against purchasing products that are not suitable for their particular situation.

The first legislation, Regulation 199, makes sure that advisors and brokers do not use false titles to imply that they have a specialty that doesn’t exist.  This pertains to senior citizens most often because deceptive brokers use titles like “certified senior advisor” to try and attract immediate annuity or life insurance business from senior citizens.  The regulation bans the use of these titles in all advertising materials, including business cards, print ads, and television commercials.

Regulation 187 deals with suitability standards in the sale of annuities and other insurance products.  Salespeople are banned from selling unsuitable products to consumers, especially when the consumers don’t understand what they are buying.  Brokers and advisors must sell consumers the best annuities and life insurance for their particular situation and make sure that the consumers are fully informed regarding the products.  They have to be aware of all fees, tax liabilities, and any surrender charges as well as all other details for the products they are planning to purchase.

The new annuity suitability model was put in place to protect investors and ensure that they get the best annuities for them, but the extra training required for advisors may have a negative impact on the choices offered to investors.  Darla Mercado of Investment News talks about this double-edged sword in “Annuity exam overload could prompt product pruning.” Each annuity sold now requires a state mandated training course and exam in the states that have adopted the NAIC’s annuity suitability model.  So far nine states are using the model, but it is forecasted that all states will adopt the annuities model in the near future.  Because of the extra training required and the hours that the education and exams will consume, it is possible that advisors will work with fewer carriers and offer fewer products to their clients.

There is a general annuity course taken online which lasts approximately four hours.  After that, advisors must take specific training for each type of annuity product they sell.  This includes fixed annuities, variable annuities, and fixed indexed annuities, among others.  Training for each single product will take about an hour.  Advisors will have to show proof of their training in order to sell an annuity in the states who have already adopted the annuity suitability standards model.  Small insurers are worried that advisors will stop selling their annuities because of the extra training required.  It is possible that they will stick to the big companies like Prudential, MetLife, and Jackson National.  As annuities become more specific and are made to meet the needs of specific clients, this extra training may just keep the best annuities for certain investors out of their reach if their advisor hasn’t gone through the training to sell them.  Hopefully the new standards do not negatively impact the annuity industry that they are meant to help.

According to The Street article “Putnam CEO Wants Annuity Oversight Agency” by Joe Mont, Putnam Investments’ CEO would like an agency similar to the FDIC in charge of lifetime income products like annuities.  Not only would he like the agency to oversee these investments, he would also like it to insure the products like the FDIC insures the money in banks.  CEO Robert Reynolds even named the fictitious agency the Lifetime Income Security Agency and he is calling on Congress to adopt his idea.  The agency would have the power to approve or deny all lifetime income products sold in the U.S.

It’s not that far-fetched of an idea, especially since the federal government, under President Obama’s lead, has been pushing Americans to secure their retirement with lifetime income products like the 401k annuity.  As we live longer, many retirees are facing three or more decades of retirement in which they need income to sustain their lifestyles.  He points out that overall sales of annuities have been relatively flat, partially because investors are wary to put so much money in one company whose guarantee lasts only as long as they are in business.  While choosing a top company takes a lot of that risk away, Reynolds argues that government insurance would help bring many more investors to the lifetime income of products like annuities.

Unfortunately some investors are turned off from these excellent investments because of stories they have heard about a few bad companies selling products that were too good to be true and not following through on their promises.  With a government agency overseeing those in the lifetime income business, only legitimate companies and good products would be approved.  This could greatly increase the consumer trust level for products like annuities, draw-down funds, and guaranteed pay-out plans.  Products like these, especially when they have death benefits, can carry Americans through a long lifetime without the worry of how they will pay their expenses in retirement.