Guarantees gone wild

Who’s busiest among the 10 employees at Partners Wealth Management, a financial advisory firm based in Naperville, Ill.? It very well could be the person charged with tracking all the new annuity features flooding the market.

In fact, says Partners Wealth founder and principal John Freiburger, CLU, ChFC, CFP, the pace at which annuity companies are rolling out customization features is so fast that that the job of tracking them and keeping colleagues informed about them has turned into a full-time position at the company. “There’s maybe 30 carriers in this marketplace and each of them has one to four or five different [annuity] products, and each product has maybe two to six different riders. Sometimes those riders have several customization options. So there are literally a couple hundred variables to consider every time you put an annuity on the table for discussion.”

From the latest twist on a guaranteed minimum income benefit (GMIB) rider to new withdrawal, bonusing and step-up features, it’s no easy task for advisors to keep abreast of the guarantees, participation opportunities and protections carriers are offering with annuity products. Most of those features are available (at a cost) as add-ons to variable annuity contracts. And many of them are designed with senior and baby boomer investors in mind.

Without the luxury of a dedicated annuity tracker on staff, many advisors who sell or recommend annuities must take on that responsibility themselves. According to Freiburger, it’s a worthwhile, though time-consuming, endeavor. “What these features do, if you take the time to analyze them, is help you control the costs and benefits the contract-holder receives.”

If the sheer volume of annuity features is enough to make an advisor’s head spin, imagine what it can do the typical client, he says. With greater customization comes greater complexity. “Explaining all the options to clients is one of the challenges. It’s hard enough for us, and we do this every day. One of the things I tell people is not to try to get on the Web, do a Google search and try to figure this out themselves. In most cases, clients want [their advisors] to do the work and then get back to them once they’ve figured it out.”

Living benefit features are leading the deluge of new annuity features. And many of those are riders that assure the contract holder (and in some cases, that person’s spouse) some level of minimum annual income for a lifetime, even if funds within the contract are exhausted. These GMIB riders continue to multiply in the variable annuity space as carriers seek to address a major concern shared by today’s seniors and boomers: longevity risk.

Prudential Financial’s Lifetime Five GMIB rider offers a prime example of how quickly features can evolve in today’s fast-paced, fiercely competitive variable annuity space. Unveiled in March 2005, Lifetime Five guarantees 5 percent annual compounded investment growth for up to 10 years and a 5 percent annual withdrawal stream for life. A year after introducing Lifetime Five, Prudential enhanced it in March 2006 with a spousal lifetime income guarantee and an automatic step-up provision. Another enhancement came last November with introduction of Highest Daily Lifetime Five, which gives investors the opportunity to increase the basis amount for guaranteed lifetime income every day the market is open and trading — providing daily step-ups. But Prudential wasn’t done yet. Just this March it further enhanced Lifetime Five with a guaranteed minimum account balance feature and an enhanced protected withdrawal value feature.

At about the same time Prudential was unfurling its latest annuity feature, MetLife was announcing enhancements to the GMIB Plus and Predictor Plus riders it introduced in 2005. In late February the company increased the compounding income base component of those riders from 5 percent to 6 percent.

Something for everyone

Such is life in what Tom Mullen, vice president of marketing in John Hancock’s annuities division, calls “a very fluid and dynamic product environment and a cycle of innovation.” Freiburger is all for competition among carriers because ultimately, he says, it yields better products for clients. “The insurance companies are trying to bring something to the marketplace. They’re looking for ways to differentiate themselves.” “We’re constantly looking at our [annuity] portfolio and scanning the competition,” acknowledges Lisa Kuklinski, a vice president and actuary in MetLife’s annuity division.

Growing demand for features that guarantee people won’t outlive their retirement savings is giving carriers a chance to separate themselves from the crowd. Through extensive market research, insurance companies also have found that today’s younger seniors in particular want customized features that give them a sense of ongoing control over their retirement nest eggs. They’re no longer content with one-size-fits-all annuity contracts that come with few if any riders.

Annuities of old were packaged such that the contract holder essentially surrendered control of that segment of their retirement savings to the insurance company. Today more people are unwilling to relinquish that control, says Jac Herschler, senior vice president and head of marketing for Prudential Annuities in Newark, N.J. “What we have learned is that people feel differently about the retirement savings they have managed themselves than they do about employer pension plans and those kinds of things. This proliferation of exciting new features reflects a realization among [annuity] product designers that what people want is more control and flexibility over the retirement savings that are produced by money they managed themselves.”