A key factor observed to be fueling record sales of annuities among the now retiring baby boomers are the guaranteed living benefits provided as optional riders to these products. Less well remarked upon, say market-watchers, is that these guarantees are having the most profound impact on qualified annuities: those offered as part of a qualified retirement plan, such as a simplified employee pension (SEP) or Keogh plan.
“The baby boomers who are transitioning into the distribution phase of retirement planning have to figure out how to make their assets last a lifetime,” says Brandon Buckingham, a vice president and director of qualified plans in the special markets department at John Hancock Financial Services, Boston, Mass. “Qualified annuities with living benefits riders provide the guarantees needed to make that financial objective a reality. That’s why we’re seeing more and more of these contracts sold in SEP-IRAs and other small business retirement plans.”
Buckingham adds that, whereas 5 years ago approximately 40% of all annuities sold were qualified and 60% were non-qualified, today the percentages are roughly reversed. That shift has resulted in a progressively higher share of assets under management on the qualified side of the balance sheet.
According to the 2007 Annuity Fact Book, a publication of The Association for Insured Retirement Solutions, Reston, Va., qualified annuities (variable and fixed) accounted for $1.07 trillion in net assets in 2006, or 56% of the market. In 2001, the figures were $612.2 billion and 49%, respectively.
Sources say the development of the riders–the big 3 provide guaranteed minimum accumulation, withdrawal and income benefits–have allowed advisors to overcome the chief objection raised about placing an annuity inside an IRA or qualified retirement plan: That such bundling makes redundant the tax-deferred treatment of retirement assets.
Sources note, however, that the growth of qualified annuities has so far not resulted in their widespread adoption within 401(k) plans. The reasons are twofold: (1) group annuities–contracts that provide a monthly income benefit to members of a group of employees and are underwritten on a group basis–generally offer a lower payout rate than individual annuities that can be purchased outside a plan; and (2) group annuities carry a higher cost relative to mutual funds, the vehicles traditionally used fund such plans.
Neil McCarthy, a certified financial planner and president of McCarthy & Associates, Roswell, Ga., observes that because the “unisex” life expectancy attached to group annuities is longer than that for the average male, men can secure a higher annuity payout rate on annuities in the open market. (The lower the individual’s life expectancy, the higher the payout rate, and vice versa.)