Cerulli Looks At Challenges Ahead For Annuities

A related problem: Failing to monitor 1035 exchanges and not tracking net sales of all products may hinder development of adequate policy conservation plans, according to the report.

Where product positioning is concerned, the “pendulum is swinging back toward positioning annuities as an income vehicle,” says the report.

But “a strong advice element is critical to implementation of a retirement income solution,” it continues. Wholesalers already envision themselves as becoming more consultative, it allows, but many “still require guidance from their insurance companies in order to do so.”

For instance, “insurers may need to show wholesalers how to position an annuity within a package,” says Plotnick.

This is very complex, she continues. “It involves a multitude of products and services. It will take a lot of cooperation, communication and hard work, and it will be essential to involve people outside the insurance sector. Products don’t exist in a vacuum, and people don’t want to be over-weighted in insurance products.”

That is so not just for the retirement period but also for the accumulation period, she adds, especially since younger people don’t have defined benefits plans to fall back upon. “The industry will have to remember that there are younger boomers who need holistic planning too,” she says.

Developing annuity options within 401(k) plans shows some promise, the report says, noting that about 40% of firms surveyed by Cerulli in 2006 indicated they had a high likelihood of considering this strategy.

“However, the 401(k) is still widely viewed as an accumulation vehicle,” notes Plotnick. To address this, 401(k)s may need to add a feature that will enable employees to purchase “annuity units” for future income, she says.

But that too presents a challenge, because the idea of buying “annuity units” may be perplexing, especially to younger workers who may be thinking more about using 401(k)s to save for a house, Plotnick says.

Firms that offer annuities for 401(k) rollovers will also need an effective way of addressing the “double tax deferral myth,” she predicts, alluding to critics who advise against putting tax qualified money inside a tax deferred annuity. In fact, a proprietary advisor survey by Cerulli found that 48% of fee-based advisors will not consider annuities for qualified rollovers, versus 19% of commission-based advisors.

To address this, the annuity needs to be positioned for non-tax-deferred benefits, such as living benefits, death benefits and annuitization, Plotnick suggests.