IRI-Morningstar: VA Carriers Limited Fee Changes in Q3 Due to Slow Economy

Fidelity lowered variable annuity fees, but Guardian, Lincoln and Mutual of America increased them

Fee changes in the U.S. variable annuity market dropped by half in the third quarter, to 10 compared to 20 in the second quarter, as more carriers held costs steady in light of the nation’s persistently slow economic recovery.

“Fee changes dropped by half, indicating that the majority of carriers have made their pricing adjustments in response to the new market realities,” according to a Nov. 29 report released by the Insured Retirement Institute (IRI) and compiled by Morningstar.

Fidelity Investments Life Insurance Co. decreased mortality and expense (M&E) fees to 0.20% from 0.25% and administrative fees to 0.05% from 0.10% on two personal retirement annuities.

Eight other changes came from fee increases by:

-- Guardian Insurance & Annuity Co., to 0.40% from 0.25%, for its highest anniversary value death benefit;
-- Lincoln National Life, to 0.70% from 0.65%, for M&E on its American Legacy Shareholder's Advantage and ChoicePlus Assurance A-Share, as well as a fee percentage increase to 0.50% from 0.40% for its i4LIFE Advantage benefit;
-- Mutual of America Life, to 0.20% from 0.25 for M&E, to 0.50% from 0.40% for administration, and to 0.50% from 0.35% for distribution for its Section 457 Contract, Thrift Plan, and Variable Annuity Accumulation products;
-- Variable Annuity Life, to 0.70% from 0.65%, on its IncomeLOCK product.

“From a trend standpoint, in late 2008 and most of 2009, the fees went up.  More recently this year, fees are going down,” said Danielle Holland, IRI’s vice president of communications and research, in an e-mail. “While decreases may be a bit rarer, there have been SEC filings this year by carriers that reduced their fees. For 3Q, there were both increases and decreases, thus the assertion that carriers have made pricing adjustments.”

Popularity of Lifetime Benefits Grows as Boomers Retire

The IRI/Morningstar report also found a pick-up in new benefits for the third quarter, with triple the number of newly issued lifetime benefits versus the second quarter, reflecting the rising popularity of lifetime benefits as boomers enter their retirement years.

“Throughout the year consumers have heavily gravitated to lifetime withdrawal benefits, and this past quarter was no exception,” said Insured Retirement Institute President and CEO Cathy Weatherford in a statement. “Given that six out of 10 boomers within five years of retirement are concerned about outliving

their savings and investments, lifetime withdrawal benefits will likely remain a first choice for consumers looking for flexibility and security within their retirement savings portfolio.”

Nine out of the 11 new living benefits released in the third quarter were lifetime guaranteed minimum withdrawal benefits (GMWB), which allow retirees to protect their investments against market downturns by letting them withdraw a portion of their entire investment each year until the initial investment amount has been recovered.

Other Highlights From the IRI-Morningstar Report

A total of 19 new benefits were issued this quarter versus six in the previous quarter, according to the IRI/Morningstar third-quarter variable annuity market report.

The pace of VA product changes remained steady compared to Q2 2010. Carriers filed 62 material changes in Q3, compared to 76 changes last quarter. When benchmarking against the third quarter of 2009, filings slowed slightly compared to 84 changes in Q3 2009.

Continuing last quarter’s trend toward more generous benefits, Genworth increased withdrawal percentages on the existing lifetime GMWB (Income Protector) to 50 from 25 basis points for some age bands.

Nine new contracts were issued in the third quarter compared to eight last quarter. RiverSource, Ohio National, John Hancock and AXA all issued new products.

New benefits issued saw a pick-up in the quarter, with triple the number of new issues, at 19 this quarter versus six last quarter. MetLife, RiverSource, Transamerica, Sun Life and Lincoln all issued lifetime benefits.

Read about Strategic Insight’s new variable-annuity living benefits guide at AdvisorOne.com.

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