Rollover IRA From Principal Targets Boomers Income Needs

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Principal Financial Group, Des Moines, Iowa, is bringing a new type of rollover individual retirement account into the retirement income arena.

Called Principal Income IRA, it is geared to retiring baby boomers who want to transition into living on a guaranteed lifetime paycheck, says Ronald Danilson, vice president, retirement and investor services at Principal.

The program accomplishes this in a two-step process. First, retirees roll savings from their 401(k)s and IRAs into mutual funds inside the IRAs brokerage account. Second, over several years, portions of the brokerage account buy portions–or, as Danilson puts it, “slices”–of an immediate annuity at then-current rates. The annuity is also held inside the IRA.

Danilson calls this buying process “benefit cost averaging” because it has similarities to dollar cost averaging.

In the early years, the program pays a monthly income that can be flexed but later on the income stream becomes fixed monthly payments for life. (See below for details.)

The program resembles traditional rollover IRAs in that it targets people who are at the point of retirement and who have retirement savings they want to invest in a tax deferred product and use for income. It resembles immediate variable annuities, too, in that it offers investment opportunities as well as an income plan.

But it is neither of those products, says Drew Denning, director, income management solutions for Principal. Instead, “it brings mutual funds and an immediate annuity together into a single retirement plan that has more flexibility and options than the other two products,” he says.

Here are the basics: The client deposits $50,000 or more into the IRA. This money is invested into the brokerage account, which has 40 mutual funds handled by different managers (AIM, Putnam, Fidelity and Principal Investor Funds). The client chooses one of five asset allocation models and selects from several funds in the portfolio to fit the asset classes.

In the early years, the client receives a monthly “target income.” Set annually, the income amount is subject to market risk. Thats because the money is paid partly from the immediate annuity and partly from the brokerage account, explains Denning. Hence, the payouts vary by performance of the brokerage account, interest rates and other market factors.

Also at time of purchase, the client chooses a “secure retirement age”–up to 15 years from date of plan purchase. This is the age at which the owner starts receiving income payments that are fully secure from market risk, says Denning. These payments are secure because all the money now comes out of the annuity side of the product.

(Note: The brokerage side of the product is no longer a factor because all its funds have been spent on the immediate annuity purchases.)

Owners can make other choices at time of program setup, too. They can elect to purchase several options, for example. These include: a survivor income benefit, caregiver income benefit, a legacy income benefit, a cost-of-living adjustment, and a liquidity reserve account.

There is a lot of post-issue flexibility, as well, says Danilson. Examples include:

“Owners can start and stop the target income payments at will,” says Denning.
Owners can change the “transition period,” he says. This is the period between date of plan purchase and the secure retirement age. To shorten or lengthen this period, the owner changes his or her secure retirement age election. Example: If a 63-year-old initially chooses age 78, he could change his selected age to, say, 70, thus trimming the transition period from 15 to seven years.
Owners can change their mutual fund choices and also their asset allocation mode, says Danilson.
Owners can withdraw funds from the brokerage account “at any point in time, with no front load, no back load and no surrender charge,” says Denning.
If owners elect the survivor or legacy benefits, “they can sell the benefits back to us later on and well put the value into the annuity,” says Denning.
Owners can put the plan on autopilot or they can take control by deciding what changes to do and when, says Danilson.

Principal provides statistical and graphical illustrations to help clients make plan decisions, the executives add. These show the monthly target income, the target income range after year one and related details. They also show the probability that the secure monthly income will be in excess of the target income.

The probabilities are not guarantees, Danilson stresses. “Our purpose is to use Monte Carlo simulations to give clients a directional sense of where their reasonable level of income will be.”

The IRA uses RetireMentor, an income planning and management system developed by Golden Retirement Resources Inc., to help clients design their plan.

Approved in 46 states, the IRA is being sold through Principals telephone counselors and its proprietary registered representative field force. Producer compensation is comparable to that of a wrap fee plan using mutual funds, says Denning. The rep also gets a commission for each slice of the immediate annuity purchased.

Baby boomers face a dramatically different retirement experience than their parents, observes Danilson, alluding to anticipated longer life expectancies, earlier retirement ages and declining guaranteed forms of retirement income. To cope, boomers want “flexibility, control and a guarantee that they wont outlive their savings,” he says. The new IRA program is targeting those needs.


Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.