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Retirement Planning > Spending in Retirement > Income Planning

Who Holds The Income Planning Franchise?

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It’s a question that has much significance for the life insurance business: Who holds the “franchise” to best meet income planning needs as baby boomers approach retirement?

The question was raised during a recent overview of the life insurance industry presented at the New York Society of Security Analysts’ 11th annual insurance conference and examined by both insurers and mutual fund representatives interviewed by National Underwriter.

During the overview, Steven Schwartz, senior vice president with Raymond James & Associates, Chicago, said he believes life insurers have a “franchise” to meet consumers’ need for a regular flow of income in retirement. Experience with mortality as well as new features such as guaranteed income benefits were reasons cited by Schwartz for his position.

One audience member asked why other products such as mutual funds could not do the same things as insurance products.

In interviews, both insurers and mutual fund representatives offer arguments about why they are well positioned to meet the need for regular retirement income.

Robert Goldenberg, vice president of annuity development with AXA-Equitable, New York, points to the guarantees that insurers offer in their products, noting that these features facilitate the creation of an income plan.

As an example, he notes that the guaranteed minimum income benefit allows contract holders to invest more aggressively to produce retirement income because of the minimum guarantee feature in the product.

Steve Norwitz, a spokesman for T. Rowe Price, Baltimore, says the mutual fund family has been focusing on retirement income planning “for some years.”

Norwitz notes the recent launch of T. Rowe Price’s suite of Advisory Planning Services, which targets saving for retirement, transitioning into retirement and managing retirement income. The services include features such as recommendations on “realistic investment and income withdrawal strategy” as well as investment strategies based on financial goals and risk tolerance.

Garth Bernard, an actuary and vice president-retirement strategies group with MetLife Inc., Long Island City, New York, distinguishes between insurers’ franchise to create a guaranteed income stream for a contract holder’s life and guarantees of protection against market risk. Bernard says that insurers do have a franchise on the former, but not the latter since options and pure financial instruments can also offer protection from market risk.

“It is a big opportunity for insurance companies. You cannot in a pure investment vehicle cover the risk of an insured living too long,” notes Bernard.

What mutual funds are doing is to help people manage their asset allocation in the accumulation phase and make withdrawal recommendations with a goal of making assets last as long as possible, Bernard says.

“Only insurance companies can deliver that longevity guarantee,” he adds. But, Bernard continues, “the most powerful innovations” will come from partnerships between life insurers and investment management companies.

Income annuities, Bernard says, can be an efficient way to generate retirement income. With a 50% chance of a 65-year-old living beyond 85, the longevity income guarantee can free up the remaining assets in the investment portfolio for other uses. “Thus packaging income annuities with investment programs can produce significantly more powerful retirement income solutions than can be provided with investment-only approaches.”

These partnerships are currently occurring with variable annuities, but the use of partnerships will become more common in the next 12 months, Bernard predicts.

Partnerships could be created in which mutual funds offer income for a certain number of years and life insurers offer stop-loss insurance for longevity.

One partnership that currently exists is in the High Watermark funds offered by AIG SunAmerica Asset Management Corp., Jersey City, N.J., according to a Jan. 8, 2007, certified shareholder report (N-CSR) filed with the Securities and Exchange Commission.

These funds, according to the filing, offer “risk controlled exposure to the S&P 500″ and, “subject to certain conditions, offer a unique guarantee to preserve both principal and investment gains over the life of the fund.”

The shares must be held until a maturity date defined in the prospectus. Also, according to the filing, if the advisor does not meet certain obligations or if it is determined that it is in the best interest of shareholders to liquidate the funds, shareholders receive net asset value, which may be lower than the high watermark value at maturity.

The funds’ guarantee is between AIG SunAmerica and Prudential Global Funding, a unit of Prudential Financial Inc., Newark, N.J.

“It is important that guarantees are in place, and that is where insurers come in,” says Deborah Maloy, a certified financial planner with Maloy Financial Services, Wakefield, Mass. They are becoming more important because of the increased longevity of clients and a decline in defined benefit plans. And, she adds, boomers are unlike today’s seniors, who can live very simply.

Maloy says she comes from an investment background but still believes that “you need guarantees.” She says some advisors she knows who did not believe in annuities and life insurance are coming to realize these products are important because of the guarantees offered. But she also notes that guarantees are starting to show up in some mutual funds.

Maloy says that although clients do not refer to income planning by name, they are asking about it. “They don’t call it that, but they are asking, ‘What is the number that I need to retire?’ and ‘What can I get for a lump sum?”


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