It's called the standalone lifetime benefit (SALB) and it aims to bring together the best of the asset management world with the best of the variable annuities universe. It is, retirement finance experts say, just the kind of product that people who have seen their nest eggs blown to smithereens need, and that's why experts believe that the SALB - a hybrid product through which investors in mutual funds can avail of the lifetime benefit guarantee offered by an annuity - will become more popular going forward.
"Everyone wants to look for solutions as there is an overriding need for guarantees for retirement income," says Tamiko Toland, chief researcher at mutual fund research and consulting company Strategic Insight (which has recently published an in-depth study on SALBs), and editor of its publication Annuity Insights. "Over the past several years, we have been hearing asset managers saying they want to get involved in the guarantee business, but not knowing how to do it. This product allows for a different set of asset managers to get involved and it also provides an opportunity for mid-level variable annuity players that are making living benefits and are currently seeing a compression in their market."
In essence, SALBS extend lifetime income guarantees, the most attractive feature of an annuity, to assets outside of annuities. "The availability of additional options means that more investors will have access to predictable and sustainable income in retirement," Toland says.
Currently, only four insurance companies are offering SALBs, and it's not likely that that number will increase for a while, since the market collapse has spooked people into staying away from new products (no matter how good these may be), and insurance companies continue to receive a lot of negative press. However, the momentum toward creating innovative, hybrid products is certainly there, says Ed Friderici, managing director of alternative retirement solutions for Hartford, Connecticut-based Phoenix Wealth Management, which pioneered the SALB product with its Guaranteed Income Edge for managed portfolios.
"If we go back three years ago, we were already looking to create something new and innovative, and apply insurance benefits to the fee-based world," Friderici says.
Indeed, the last major market downturn in the wake of the dotcom bust proved that investors really needed to diversify more, and this resulted in the proliferation of target date and lifecycle funds. Now, it's also clear that investors need to have some kind of guaranteed income stream to guard against severe market downturns, Friderici says.
The Phoenix Guaranteed Income Edge provides a 5% guaranteed lifetime income stream on the investment portfolios of Lockwood Advisors. "One of the issues we face is that many financial advisors lack experience with annuities," Friderici says. "We tell them that [Guaranteed Income Edge] offers a 5% guaranteed lifetime withdrawal benefit, and that it can be turned on and off on model portfolios. Every year on a person's anniversary, if their account goes up, they can lock in the account value and draw down 5% on a larger nominal pool of money. But if we go through another rough spot in three years, an advisor can tell his client 'your account value is down but your retirement base is stable and you are still locking in 5%.'"
The guarantees provided by the SALBs are a lot simpler than the traditional variable annuity guarantees, since they are designed to attract advisors that are not that familiar with variable annuities, Toland says.
"Typically, a variable annuity is made by an insurance company and sold by the same insurance company. In this case, though, the insurance company is the manufacturer but their asset management partner is the one with the feet on the street," she says. "The SALB is really designed to help enhance advisors' - especially those that are not selling guarantees of any kind -- ability to provide more benefits for their clients."
Although the uptake on SALBs might be slow, the product has been built for the long-term, Friderici says. After all, target date funds were not an instantaneous hit either, he says, and people only started getting into them a couple of years after they first came out. Similarly, the interest level in SALBs is sure to increase as the impact of the financial crisis diminishes, so "in the next 12 to 18 months, you should see a really high level of interest and the early innovators will benefit."
The Strategic Insight report, entitled Guaranteed Retirement Income Beyond Annuities: Standalone Living Benefit, A Novel Product Solution for Mutual Fund and Managed Account Investors, can be found here.