How Variable Products Are Responding To Retirement Uncertainties

A funny thing happened on the way to the marketplace: the classic securities law status signposts have been turned around.

Variable insurance products are the marker for securities law status that requires variable product registration under the Securities Act of 1933. Meanwhile, fixed insurance products are the marker for eligibility to the statute’s exclusion of certain insurance products from status as a security.

The core reason why these products are the markers has to do with risk. That is, variable products entail shifting the investment risk to the contract owner, while fixed products entail retention of the risk by the insurer.

Now, enter the guaranteed minimum withdrawal benefit and guaranteed income benefit features in variable products. These newer features result in the insurer bearing the investment risk that the owner-accumulated assets will be insufficient to address the diverse concerns on which retirees are currently focused.

This perception is not intended to suggest that the Securities and Exchange Commission or the courts would find the role of variable products has been reversed. At a minimum, these bodies would be likely to find that, as a guarantee of a security, the guarantee is itself a security.

Rather, the perception is a useful tool for better understanding the reason for, and nature of, the recent proliferation of differing retirement and income guarantee optional features and the addition of sub-features such as step-ups. Moreover, it suggests that the SEC staff should cut the insurers some slack regarding the related investment restrictions discussed below.

Most people who are managing their investments to provide retirement income want to provide themselves with sufficient lifetime income and/or to provide for their heirs and dependents. The main obstacles they face in meeting these goals are the uncertainties shown in the box.

The current and likely continuing volatility of the markets, particularly equity, coupled with the irrepressible fear of inflation, make these two uncertainties even greater. As others have expressed recently, the simple fact is that the retirement years are the spending years. Hence, the predictable prime concern is outliving one’s assets, frequently coupled with fear that one’s dependents will be left without resources and no way to manage or hedge these risks.

In reviewing and comparing the array of optional retirement benefits, it soon becomes clear that this GMWB variety seeks to address the differing concerns of the owners. Hence, there are features with and without one-time, annual, or periodic step-ups; payment guarantees for varying specified periods; and payment guarantees for the life of the owner or joint lives, both spousal and non-spousal.