By Linda Koco
Orlando – What is a living benefit guarantee doing in the hands of a fee-based advisor who does not sell annuities?
It is providing a way for fee advisors to offer income guarantees to clients who own mutual funds and managed accounts, said speakers here at the annual retirement industry conference.
The conference was co-sponsored by LIMRA International, Windsor, Conn.; LOMA, Atlanta; and Society of Actuaries, Schaumberg, Ill. Breakout sessions addressed non-insurance guarantees as well as other emerging retirement income approaches, as follows.
Annuity guarantees for non-annuity products. These are essentially guaranteed living withdrawal benefits, but applied to mutual funds and managed accounts, not variable annuities, said Ed Friderici, managing director-business development and strategic partnership, The Phoenix Companies, Inc., Hartford, Conn.
Insurers offering them have ported the GLWB concept from VAs to the equities world, he explained.
His company offered the first such product in 2008, he said. Three other carriers (Allstate, Genworth and Nationwide) have since entered the market, and others are planning to follow.
Why offer this insurance feature on a non-insurance product?
Fee-based advisors have cost, complexity, control and commission issues with VAs and so won’t sell them, said Friderici. However, these same advisors recognize that some clients need and want guaranteed withdrawals. If a guarantee is attached to an “investment engine,” he said, that addresses advisor concerns with VAs.
Such a guarantee offers the best of both worlds, he added, alluding to guaranteed income and the advisor’s best efforts.
The guarantees are voluntary, he added, explaining they can be turned on and off whenever the client wants.
“The product is not improving or fixing the VA,” stressed Tamiko Toland, principal researcher at Annuity Insight, New York City. “It’s a different way to skin the cat.”
In fact, she said she thinks that, as marketing of the feature widens, this will probably give a boost to sales of VAs having guaranteed living benefits.
The products are so new that they do not as yet have a generic name, Toland said. Her term for the feature is standalone living benefit, but she said other terms include hybrid annuity, contingent annuity, synthetic annuity, portfolio insurance, withdrawal insurance, mutual fund living benefit insurance, and mutual fund wrap.
By whatever name, “the guarantee is still insurance, and it is structured like a simple VA with a GLWB,” she said. It is separate from the asset management, is offered as a contingent deferred annuity or certificate, and is registered with the Securities and Exchange Commission.
Other common features include: annual step-up in guarantee value, portfolio-based pricing, spousal option, annuitize at age 100 to 105, and little or no death benefit.
The minimum investment ranges from $2,500 to $250,000, “so it’s not just a high net worth product,” Toland said.
This is essentially a “new product class” for carriers, Toland said. “It’s not the end point of innovation (in retirement income products) but rather an expansion of market potential for carriers and asset managers…It adds value to money management products.”
Retirement income portfolios. The big question for advisors is how best to combine retirement income products and solutions, said Chad Runchey, actuarial advisor, Ernst & Young, New York City.
He suggested the answer is to use retirement income portfolios that involve product allocation. “Look at all solutions and have it be product agnostic,” he said.
Suggested products include insurance (life, long term care, etc), annuities (single premium, variable, etc.) and investments (mutual funds, bond/certificate of deposit ladders, structured products, etc.).
Use a back office analysis process to set up the portfolio, Runchey recommended. This analysis should take into account client objectives and risk tolerance, as well as market volatility, inflation uncertainty, health care costs, taxes and other factors, he said. “Also look at what might happen across multiple scenarios.”
The approach has “great mid-market potential,” he contended. The analysis at the backend makes the delivery process more efficient, he explained, “and the client still gets advice.”
To show how the portfolio approach works, Steven Feinschreiber presented some scenarios. The vice president-research and development at Fidelity Investments, Boston, he said that Fidelity will later this year roll out a proprietary system for advisors to use in delivering such portfolios to clients.
Right now, Feinschreiber said, advisors have to do it all themselves, “and that’s expensive.”
To work effectively, retirement income portfolios need to be affordable, effective, client appropriate, size appropriate and reasonable, he said.
The portfolios typically include sizeable allocations of guaranteed income products to fund discretionary expenses as well as to address longevity and market risk, he said. Examples include fixed immediate annuities, guaranteed minimum withdrawal benefits, variable immediate annuities, etc. This is addition to Social Security and traditional pensions.
The portfolios also use products that involve more risk. These are used to cover discretionary expenses. Examples include systematic withdrawal plans, income payout funds, bond ladders, managed accounts, etc.
Funding allocations in the portfolio will vary according to client situation, he indicated.
For instance, unsophisticated investors who are interested in professional management and automatic payments may want a portfolio emphasizing guaranteed income and inflation protection, Feinschreiber said. But sophisticated investors who manage their money themselves, have a high tolerance for risk, and are willing to spend down principal, may want inflation protection but no guarantees.
By comparison, SWPs “are rarely the right solution,” Feinschreiber said. SWPs are simple to use and can work for many years, he allowed, but he said SWP clients risk running out of money in the advanced years, and the plans don’t perform well in periods of extreme market downturn.
Retirement income software. Software to help advisors help clients draw down retirement income is growing in availability and functionality, indicated Michael P. Fitzgerald, senior analyst-insurance practice with Celent, Chicago.
A study his firm did last year found that most of the software targets the mass affluent, but some systems do focus on the high net worth, he said. Most are offered to advisors through their providers.
The Celent study covered systems from 14 software companies. It found that most of the 14 offer functions like these: integration of the income plan with the client’s accumulation plan, incorporation of all sources of income, tax planning features, expense categorization and budgeting.
It also found a few firms offering functions that are still evolving, said Fitzgerald. These include: handling a multi-period retirement, consideration of partial retirement, use of alternative simulations, human capital consideration, and reverse mortgage consideration.
Most vendors believe retirement income software needs to be planning based, not product based, he said. Vendors also believe the software should be flexible enough to accommodate scenarios, content management and document management; and should be able to support ongoing monitoring and progress, he said.