For the past 20 years, annuities have been on the cusp of greatness. But now they’ve arrived, according to Douglas Dubitsky, vice president and head of product management at Guardian Retirement Solutions in New York City.
“In terms of economics of the business world, there’s never been a time that our products made as much sense as they do now and been as appropriate for our country as they are now,” he said.
The graying Baby Boomer population has a lot to do with it. The first wave of Baby Boomers has retired but they’re more active in retirement and living longer. Combine that with the incredible stock market swings of the past five years and the results have taken a psychological toll on people heading into retirement. They’re exhausted and looking for ways to protect their retirement savings while they collect guaranteed income, he said.
In the third quarter of 2013, sales of annuities rose 9%, year-over-year, to $59.4 billion, according to a report by LIMRA Secure Retirement Institute. For the first nine months of the year, total annuity sales were $167.6 billion.
All forms of annuities increased from 2012, except variable annuities, which declined 2% in the third quarter and 2% year-to-date, according to LIMRA.
Newer, more flexible annuity products, like deferred income annuities and single premium immediate annuities have really started to take off because “there’s a simplicity and pureness to them so they are appealing to people,” Dubitsky said.
They’re easy to understand, don’t charge a bunch of hidden fees and there are no age bands for withdrawal, he said.
According to the Insured Retirement Institute, deferred income annuities really came into their own in 2012, reaching nearly $1 billion in sales. And while that isn’t a huge chunk of change when talking about the annuities market, the IRI believes DIAs will continue to grow into 2014.
DIAs are designed to provide income later in life to protect against the risk of outliving assets. Income on DIA products can start anywhere between two and 40 years from issue, but most DIAs are elected with an income start date between five and 15 years from the date of issue.
SPIAs offer guaranteed income a person can’t outlive. Individuals give the insurance company a lump sum of money and, in exchange, the company provides a guaranteed paycheck for life. One problem that’s been pointed out about income products is the lack of liquidity. Once they sign on the dotted line, their money is tied up forever.
Dubitsky said this type of thinking is incorrect.
“By providing them with income, it has given them freedom to make other decisions,” he said.
Since the market crash in 2008, the biggest problem advisors have with their clients is fear, he said. They’re afraid to pull the trigger on a financial plan.
“Guaranteed income takes the fear factor off the table,” he said.
Variable annuities have been popular for years and will continue to hold a huge share of the overall annuities market.
“Variable annuity products are very valuable for people who want equity market upside and guaranteed income. For many people, they simply want pure income,” he said.
Income products used to be one size fits all, but that is no longer the case, Dubitsky said. Over the past five to 10 years, a lot more flexibility has been built into the design of income products, including cost-of-living adjustments and death benefits.
Another reason sales of annuity products will continue into 2014 is that people are searching for the elusive guaranteed income that used to be provided through employer pension plans.
More companies now offer defined contribution plans, which are great for accumulating money, but don’t do enough when it comes to helping people turn that money into income in retirement, he said.
The next big boom is offering annuity products within 401(k) plans.
The problem with this is that annuities can be very complex, but when you start moving that annuitization into an ERISA-based 401(k) plan it is even more complex, he said.
It used to be that people could only turn their 401(k) money into an annuity if they left their job and needed to roll the money into another retirement vehicle or a company was terminating its plan. Now, in-plan annuity options are gaining some traction, he said.
“It’s inevitable as an industry we will solve the problem of how to pair guaranteed income with 401(k) assets,” Dubitsky said.
He sees this as a huge trend in the future.
“More plan sponsors are legitimately concerned their employees will run into trouble when they try to retire. We will provide the smoothest transition from asset accumulation to retirement,” he said.
Also in 2014, the nation is going to continue to see new income options. Guaranteed income and the simplicity of products is going to dominate the industry.
“We’re going to see people given the ability to custom tailor to their needs. Equity markets are going strong and we will continue to see strength there,” he said.
Dubitsky also envisions continued growth in the DIA market, but simplified versions that allow more flexibility.
The educational component surrounding annuities will continue to gain in importance on both the advisor and participant sides of the industry. Most people don’t know how long they will live or how much money they will spend in retirement. Many don’t know that they can take Social Security benefits in many different ways, depending on when they start taking their benefits, he said.
People need to develop an income distribution plan like they did a wealth accumulation plan, he said.
“This might not be an easy time to be in the industry, but it is a great time to be in the industry,” Dubitsky said. “The next 30 years ahead, if you are in the annuity world and the income planning world, there will be an unprecedented wave of people who need our products, advice and insight and need our help.”
He added that it is a great time for consumers as well because the insurance industry has recognized that it has an obligation to simplify its products and educate both advisors and customers about them.