Products Are Targeting Boomers Income Needs And Mindset
With the baby boomers approaching retirement age, insurance companies and industry observers are focusing renewed attention on the retirement income features of annuity contracts.
The industry always has been interested and watchful of what is new and “cutting edge.” With the boomers approaching retirement, the monitors are focused on that market and what companies are designing to address boomer needs. Retirement income, long term care and medical savings account products are each getting attention.
However, because baby boomers are probably the first group with increased anticipated longevity, improved retirement income features would seem to address one of their most pressing needs: the need for lifetime income.
Business publications, including those written for the broad business audience, now are carrying articles about this, suggesting that boomers should start finding ways to make their retirement investments last.
Not all observers agree that baby boomers are pursuing or will pursue that goal. Some have noticed that, even though older boomers are approaching or entering retirement, many do not yet think of themselves as retirees. Rather, they say they merely have stopped workingbut they arent “retired.” Indeed, expectation is growing that for many boomers conserving assets to assure adequate income over life expectancy wont be a driving force for boomer financial planning until after the boomer reaches age 70.
Still, experts vary on their estimates concerning when is the ideal time to annuitize or buy income annuities. Increasingly, the older ages are being vetted as likely more preferable. Some experts favor annuitization at the older ages but actively recommend against doing so in the younger retirement years. Meanwhile, some new annuity approaches allow the customer to buy the income product now with the expectation of not taking benefits until after, say, 3 decades.
The proliferation of variable annuity products that emphasize guaranteed minimum income benefits (GMIBs) and guaranteed withdrawal benefits (GMWBs) suggest that yet another trend is afoot: products that rely on the assumption that baby boomers have an immediate concern for the possibility of outliving their assets. They also reflect an emerging recognition that inflation is not a thing of the past.
Notwithstanding the frequency with which companies are adding GMIBs, GMWBs and other income-oriented features, the path has hurdles. Not the least of them is the tentative position of staff at the Securities and Exchange Commission, to the effect that asset allocation programs entail the rendering of investment advice to the owners and require an advisory agreement between the owner and a registered investment advisor.
It has been a full year since the SEC staff conducted an industrywide inquiry into asset allocation programs, but the staff has yet to provide formal guidance. The SEC staff has, however, been unwilling to permit registration statements with what they call a “dynamic” asset allocation program to be declared effective. If the latest informal advice from the staff bears fruit, guidance may be made public by the time of publication of this article or soon thereafter.
The obvious question is: “Why is this important to the guarantee features that insurers are developing?”
A number of income features require that owners allocate their contract values to a specific selection of investment alternatives that are reallocated or adjusted to reflect changing market conditions. It is this reallocation that bears the label “dynamic.”
As the industry recognizes, the restricted asset allocation and dynamic reallocation feature helps the insurance company manage the risk of providing its guarantee as well as price the feature reasonably. If anyone is getting investment advice, it is the insurer, which has a significant promise to keep and significant potential financial obligation under these features.
The new capital reserving requirements now being considered by the National Association of Insurance Commissioners make protection-oriented products economically challenging for insurers. Industry executives say asset allocation helps, as does hedging. Therefore, denying the insurers this risk management tool only can lead to increasing the costs to consumers.
Specifically, requiring an advisory relationship with the contract owner for dynamic asset allocation adds costs that will need to be paid by consumers. This is true for free-standing asset allocation models as well as income protection-linked features. Formal advisory relationships cost money; insurers either will have to stop offering the models or increase charges to pay for the benefits.
This all adds up to a lose-lose situation for consumers and a “cant win for losing” burden on insurers.
Joan E. Boros, Esq., is a partner with the law firm of Jorden Burt LLP in Washington, D.C. Her e-mail address is JEB@jordenusa.com.
Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 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.