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October 22, 2008 at 08:00 PM
“While it hurts to see an account balance go down or to sell [stock] when prices are low, at the end of the day, if the funds invested in a variable annuity are a material part of the nest egg, then clients need to take steps to insure they preserve what they have,” says Jeffrey Sharp.
A certified financial planner and principal for private client services and qualified plan investments at the SilverStone Group, Omaha, Neb., Sharp says that, “if it means reallocating to a more conservative portfolio, such as a bond or money market fund, then so be it.”
This bit from Sharp looks increasingly attractive among skittish investors who, concerned about today’s wildly fluctuating stock prices, earlier purchased a variable annuity without any of the guarantees that can protect invested assets against a market slide. For many, shifting into the more conservative portfolio of an annuity’s fixed account is appealing because it can backstop investors against further losses.
But sources tell Annuity Sales Buzz that more risk-tolerant investors would do well to consider other approaches. Among them: diversifying into alternative vehicles available within the subaccounts of certain VAs, such commodities, real estate investment trusts and hedge funds; spreading retirement funds among several annuities through a laddering strategy; or purchasing a rider that systematically increases equity exposure when markets recover.
As for moving assets into a fixed account, Sharp himself is quick to point out that this approach is not without risk. Whereas equity investments are subject to market fluctuations, the insurer’s ability to make good on a “guaranteed” interest crediting rate offered on a fixed account–and even to assure that funds invested will ultimately be paid out–depends on the carrier’s financial stability, he notes. The reason: fixed accounts are backed by the insurer’s general assets.
Sharp recalls that when the New Jersey Department of Banking and Insurance placed the now-defunct Mutual Benefit Life Insurance Company into rehabilitation in July 1991, individuals who held funds in variable subaccounts were able to liquidate these assets in short order. But holders of the insurer’s fixed accounts had to wait many years to receive all of their invested assets.
Therefore, when contemplating such a move, producers and clients should investigate the insurer’s financial strength, and in particular the carrier’s credit rating with the major credit rating agencies, says Sharp.
They should also read the contractual rights stipulated in annuity contracts, he indicates. A carrier may, for example, reserve the right to limit the distribution of funds from a fixed account to 20% of the account value per year; or to hold the money for 6 months before distributing.
“Clients need to understand the potential constraints associated with the fixed account,” says Sharp. “To the extent there may be a concern about the company’s financial stability, they also need to ferret this information out before shifting assets from a variable to a fixed account.”
While moving funds from variable to fixed accounts may be the priority of some investors near-term, the question for many in the mid-term is when to move back into equities so they can take advantage of a future market upturn. Though it is difficult to time the market, advisors note that many clients would do well to leverage VA features that automatically increase equity exposure over time.
Case in point: Prudential Annuities’ Lifetime 7 Guarantee VA protects investors’ account values when markets perform poorly and systematically reinvest funds in equities when stock values rise. Via its guaranteed minimum withdrawal benefit rider, the annuity locks in the highest daily account value and yields a guaranteed 7% compounded annual growth rate until the client elects to annuitize.
