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Annuity Analytics: AXA Equitable Retirement Cornerstone

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Last month I addressed a variable annuity that protects retirees against the dreaded risk of inflation by offering a guaranteed payout rate linked to the Consumer Price Index (CPI), which is computed by the U.S. government via the Bureau of Labor Statistics. But there are many ways to offer inflation-protected income other than linking payouts to the CPI explicitly. A number of market-based instruments can perform the same task. In this month’s column I will focus on a VA that helps retirees manage inflation risk (amongst other risks) using market methods, which also offers more flexibility than linking payments to the CPI. This month I will review the AXA Equitable Retirement Cornerstone VA.

The financial crisis of 2008/2009 forced many companies to fundamentally rethink and ultimately redesign their VA business to protect the insurance company as well as investors and policyholders, and AXA Equitable is no exception. Their Retirement Cornerstone VA is not just another tweak on an old theme — with quarterly versus daily ratchets, or simple versus compound interest — but is actually designed on a new chassis.

Astoundingly, the product takes 1,752 pages of prospectus to explain (I kid you not!) and the disclaimers are a spectacular monument to the litigious environment in which we now live. (Who in their right mind can absorb such a document? It’s beyond me.) Your humble servant actually took the time to thumb through it (in PDF format — I would never massacre that many trees for a mere column) and can assure you that 50 percent of it could be summarized with a few basic equations. Perhaps Harry Markopolos is right and we should replace the SEC with quants, but I digress.

How Does it Work?

Boiled down to its essence the Retirement Cornerstone product isn’t as complicated as it initially appears. In fact, the videos and other material on the AXA Equitable website were quite good in explaining the underlying concepts. The few remaining questions I had were promptly answered by their senior V.P. of annuity products, Steven Mabry. In fact the overall design philosophy makes a kind of intuitive sense once you actually think about it.

Here’s how the product works, in a nutshell. Consider two different investment silos: An accumulation (A) silo and a benefit (B) silo. The company calls them “sleeves,” or two sides of a ledger. In the A silo you deposit and invest premiums, select your investment funds and asset allocation, pay your minimal annual fees and hope the market cooperates so your money grows. The A silo, considered in isolation, is a garden-variety tax-sheltered VA. It doesn’t offer any additional guarantees, but then again it doesn’t charge for additional living benefits either. So far this is nothing to get excited about.

In contrast to the A (accumulation) silo, the B (benefit) silo is also a segregated pool of money, but with more limited investments and restricted portfolio models available. This silo, however, offers a guarantee of lifetime income if you “behave” by making “reasonable” withdrawals. To understand the concept behind silo B, think of a Guaranteed Minimum Income Benefit (GMIB) with a benefit base, roll-up rates, maximum allowable withdrawals, investment restrictions, etc.

Finally, the A (accumulation) and B (benefit) silos sit side-by-side, within the same general policy. So far a “cheap” VA (tax-sheltered growth) lives next door to an “expensive” VA (with a living benefit.)

But here is where it gets interesting. First, AXA Equitable allows the policyholder to move money from silo A to silo B whenever you or your client want and see fit. The transaction is seamless. So, if your A silo has done well — markets are up — you can move some of your gains into the B silo with its associated guarantees. It’s like taking money off the table after a few good runs in your favor. This sort of transfer (partial 1035 exchange) isn’t easy to do if you have two separate policies and especially if they are with different companies.

Secondly, the all-important benefit base “roll-up” rate — instead of being fixed forever at the time of purchase — is linked to the yield of the 10-year U.S. Treasury bond. On each settlement date it is fixed at the average rate during the past month plus an additional 1 percent. So, in contrast to the nominal 4 percent, 5 percent or even 6 percent that you might see credited to a benefit base (or guaranteed withdrawal) in a competitor’s product, this rate will increase as market interest rates move up. In January 2010 they were offering 5 percent.

So, herein is the link or connection to inflation protection: If inflation expectations increase, so will the yield curve as proxied by the 10-year U.S. Treasury rate. Ergo, the roll-up rate will increase as well. Convoluted, perhaps…but effective. Moreover, for those of us who worry that the U.S. Government has an incentive to manipulate the calculation of the Consumer Price Index (CPI) downwards (please don’t get me started) then a market-based adjustment offers some relief. You can’t fool the bond market!

Now, I know that I am playing a bit loose with the description of this product. But this is as accurate as you can get on a first pass with approximately 1,752 words at my disposal. If you want the details, 1,752 pages await you.

Things I Like

As I alluded to earlier, many observers are anxiously dreading the return of inflation and anything that locks in a nominal income stream places the burden of inflation risk squarely on the retiree. But with the AXA Equitable Retirement Cornerstone product, if and when yields go up so will the roll-up rate and hence your client’s benefits. A client can withdraw the entire amount of the (extra) roll-up or only use a portion (so-called dollar-for-dollar withdrawal) and let the benefit base grow. This together with the capacity to move funds from silo A to B provides more than just flexibility for clients; it enables the advisor to manage the relationship via periodic reviews, updates and discussion. Nice excuse for a phone call.

Also, although I usually refrain from opining on the quality of investment vehicles within a VA subaccount, the Retirement Cornerstone contains over 90 different choices, which is more than enough.

Things I Dislike

Like many other VAs with living benefits, there is a restriction on the maximum allowable equity allocation in the guaranteed (B silo) account; in this case it is 60 percent. There is also a one-year lag for capitalizing on the roll-up rate to the benefit base, and an overall cap of 8 percent on the roll-up rate with a minimum of 4 percent. So, this product definitely won’t protect against hyperinflation.

Also, while each individual guaranteed component seems fairly priced relative to the rest of the industry, when you add up the Mortality, Expense and Administrative (M&EA) fees, the guaranteed lifetime income rider fee, the money management fees, and so on, you can arrive at 325 basis points as the lowest possible fee the company is allowed to charge on the most aggressive (and hence valuable) asset allocation. And, for fun, if you add up the maximum possible fees for somebody who buys everything on the cafeteria menu you can get to 650 basis points on the L-share, which is the more expensive version compared to the B-share. (I’m sure the equity risk premium is jealous.) And, of course, there is a seven to eight year deferred surrender charge schedule on the L- and B-share versions.

More importantly, in contrast to a Guaranteed Lifetime Withdrawal Benefit (GLWB), this particular GMIB runs the risk that a client’s income will decline if and when the account value hits zero before age 85. In that case if you have been using the full roll-up rate entirely for income, then your remaining lifetime annuity will be based on a flat annuitization factor of 4 percent for single lives (and 3.25 percent for joint lives) applied to the original benefit base. In plain English, you are guaranteed lifetime income but not necessarily a predictable and increasing one.


Let’s put it this way: the Retirement Cornerstone VA isn’t going to convince the VA agnostics to adopt religion. If you are the Dawkins or Hitchens to the VA believer, you ain’t going to like this. But then again, VA atheists won’t touch any of the hundred other products available in the market. They probably invest in index funds and low-cost ETFs and (hopefully) annuitize a portion of their clients’ assets into Single Premium Immediate Annuities (SPIAs) to create a personal pension. Not a bad alternative strategy, I must say.

The AXA Equitable Retirement Cornerstone is for advisors (and clients) who are already comfortable with the VA in general and the GMIB in particular and can appreciate the tax benefits of tax-sheltered growth within variable annuities, with a wide selection of investments. Remember, I view my mandate here as shedding light on important and innovative products under the assumption that the VA is only a fraction of the retiree’s portfolio, directed to those without pensions while practicing prudent product allocation.

So, overall I grade AXA’s Retirement Cornerstone a 6/10. And, like the 10-year Treasury rate to which the income is linked, if rates do go up — or they make some changes — I’ll increase the grade!

Moshe A. Milevsky, Ph.D. is a professor at York University in Toronto, Executive Director of the non-profit IFID Centre at the Fields Institute and CEO of the QWeMA Group ( His latest book, Your Money Milestones: a Guide to Making the 9 Most Important Financial Decisions in Your Life, was just published by FT/Pearson.