The recent debate among state insurance commissioners as to the regulatory status of contingent deferred annuities has focused advisors’ attention on new solutions that, if demand takes off, could significantly boost the market for insurance products in the retirement income planning space. Such an expansion, sources tell National Underwriter, is potentially a boon for life insurers marketing to fee-based financial professionals who have historically shunned annuities because of the products’ perceived high cost and complexity.
CDAs are meant to appeal to producers who do not specialize in annuities, explains Bruce Ferris head of sales and distribution, Prudential Annuities, a unit of Prudential Financial, Newark, N.J. Examples of non-annuity producers are fee-based advisors who offer advice and services for mutual fund wrap accounts, separate managed accounts, and fee-based platforms with broker-dealers. CDAs complement such advisors’ ability to provide asset selection, broad diversification recalibration and adjustment of investments.
Moreover, CDAs offer protection against longevity risk and sequence of return risk for assets that are being used for retirement income, says Raymond Benton, a Denver, Colo.-based certified financial planner. The benefits of CDAs, he says, are similar to those provided by variable annuities with GLWB riders and are effectively like owning the rider without the rest of the contract.
CDAs offer investors a new form of principal protection: a guaranteed lifetime withdrawal benefit that guards investments against losses during market downturns. The twist is you don’t have to buy a conventional variable annuity and GMWB rider to secure the guarantee. The insurance protection hitches onto a mutual fund or exchange-traded fund from a brokerage firm, and so the underlying asset is held outside of the life insurance company.
The CDA provides the many benefits of a variable annuity with a living benefit: guaranteed lifetime income and annual lock-ins and step-ups—all without the typical downside of high surrender charges, limited underlying fund options, and base mortality and expense charges. And because of the compensation method—the charge for the insurance protection is generally a fixed percentage of assets under management, the percentage varying with the equity-to-non-equity ratio of the investment portfolio—the product is well suited to the fee-based advisor’s business model.
The market trajectory for CDAs is potentially huge, particularly for guaranteeing exchange-traded funds (ETFs). In May, market research firm Strategic Insight reported total ETF net inflows of $58 billion for the first four months of 2012, a pace that could result in the sixth straight year of $100 billion or more in annual net inflows to U.S. ETFs. Experts say that a significant number of investors who are channeling retirement assets into these funds, especially those in or near retirement, may be amenable to adding a CDA to the ETFs to protect their assets.
Prudential’s Ferris says that interest in the products among fee-based advisors has risen markedly since the 2007-2009 recession, when many investors’ retirement portfolios were pummeled by the declining equity values. One measure of the market fall, the S&P 500 Index, plummeted by 35%. Prudential itself is actively developing a CDA it intends to bring to market soon.
Other companies that have debuted, or plan to bring, CDAs to market—Nationwide Mutual Insurance Co., Great-West Life & Annuity Insurance Co., Transamerica Life Insurance Co., among others—are mostly targeting individual mutual fund and ETF investors in the non-qualified market. But company execs say the products could also prove popular among participants in employer-sponsored retirement plans, such as 401(k) and 403(b) arrangements.
A key benefit is that the qualified plans enjoyed preferential status under IRS rules, so mutual fund and ETF assets—as in the case of VAs—grow tax-deferred. What is more, large companies may be able to negotiate competitive premiums for a GLWB option on behalf of their employees.
“Assets that accumulate in a 401(k) or 403(b) already are tax-qualified,” says Chris Bergeon, vice president of Greenwood, Colo.-based Great-West Life & Annuity Co. “So you don’t need a VA to get preferential tax treatment. That makes an income guarantee an attractive solution for customers rolling from a 401(k) into a CDA-protected IRA, which retains the tax-deferred growth status.”
The Products Up-Close
One example of CDAs on offer in the qualified plan arena, as NU reported in April of 2011, is the result of an unusual partnership between New York-based investment management firm Alliance Bernstein and three life insurers that collectively guarantee the product: AXA Equitable, Lincoln Financial Group, and Nationwide Financial. As the default option of a qualified plan, the CDA rides on a target date mutual fund that resets the portfolio’s asset mix according to a selected time frame. The insurance provides plans participants with a guaranteed lifetime income stream and access to their account balances at all times.
More common among the new offerings is Great-West’s Secure Foundation Guarantee, a GLWB that sits atop the company’s Maxim Secure Foundation Balanced ETF Portfolio, a fund of funds that invests in exchange-traded funds from investment management firm The Vanguard Group Inc., Malvern, Pa. While protecting against market dips, the GLWB locks in gains by stepping up the benefit base on yearly anniversaries of the product’s purchase. Assuming an account starts at $250,000, rises to $300,000 six months thereafter, then closes the year at $275,000, then the account’s highest value—$300,000—becomes the new benefit base. When the client begins distributions, the last of the step-ups is used to determine the guaranteed lifetime payout rate.
Great-West’s Bergeon says the insurance guarantee gives normally risk-averse clients the security to stay invested in the capital markets and not worry about a market downdraft eating into their nest egg. For such clients, this sense of security provides a large advantage over fixed annuities.
Great-West began distributing the product to individual investors on a pilot basis through an unnamed bank-affiliated broker-dealer. Assuming that product positioning and operational processes meet company expectations, Great-West will add other bank-affiliated broker-dealers this summer.