With so much emphasis today on the guaranteed lifetime benefits offered by variable annuities (and the fiscal angst some carriers are currently feeling in funding those contractual obligations), it’s easy to forget that the original intent of the product was to provide a tax-deferral saving vehicle, reminds Jefferson National CEO Mitchell H. Caplan, below right.
“One of the real reasons for the introduction of annuities decades ago was about saving in a tax-deferred manner,” Caplan says. “It wasn’t necessarily in any meaningful way about how the industry has evolved, in my opinion, around death benefits and life benefits and guaranteed income. It was really about a way to try to encourage people to cost effectively save and plan for retirement.”
It should be pointed out that Jefferson National’s variable annuities (VAs) don’t offer lifetime income riders. Instead, their selling point is as a tax-deferred investment option for traditionally highly taxed assets beyond an IRA or 401(k), Caplan emphasizes. In 2012, Jefferson National sold $410 million worth of variable annuities, entirely through the fee-based advisor channel.
In light of recent VA benefit reductions, buy-back offers and even some carriers exiting the variable annuity line altogether, Caplan says it might be time for the VA industry to revert to its original purpose.
In his view, those living benefits have been “mispriced” and consequently are becoming a drag on carriers’ balance sheets as interest rates remain stubbornly low.
“We’ve been in an incredibly low interest rate environment for a very long time and it’s very hard for these companies to manage through the balance sheet risk. That is why you are seeing companies either exit or try to buy them out,” Caplan says.
Or carriers could do what Jefferson National has done and structure their VAs without any living benefit riders. Another company that has done just that is Sammons Retirement Solutions.
Back to basics
Stripped of living benefit options, such variable annuities may be leading the industry back to its original purpose of tax deferral, at least for a period of time, Caplan says. “What we have chosen to do is basically take it back to basics.”
Yet that doesn’t mean the industry will remain static. If interest rates rise, Caplan predicts carriers will once again boost the benefit menu.
“Like anything, it is as a result of a moment in time,” Caplan says. “My best guess is if you suddenly saw higher interest rates and a steeper curve, then a lot of carriers may decide that this is the moment to stay or get back into selling all the benefits and features because there is a way for them to manage and price it so they can make a profit and generate a return that is significant.”
He further foresees more innovation in the industry. “Do I think there are products that we can build that effectively become the next generation of products that offer downside protection and can feel and look like retirement income in a different way and at a super low cost? I do.”
Focus on RIAs
Another strategy Jefferson National has undertaken is distributing its VAs exclusively through fee-based advisors and RIAs. According to Caplan, that strategy dovetails with two trends he witnessed before he came to Jefferson National in 2010, during a period when was working as an advisor in a private equity shop.
While there, he observed a budding group of investors, which he terms “the emerging high-net-worth” demographic. These are investors who had between $2 million and $10 million in net worth, and between $1 million and $5 million in investable assets. This is a group, Caplan surmised, that is looking to build wealth for retirement.
He also deduced that the best way to reach this demographic was through a financial advisor, and the fastest growing distribution channel “by multiples” was the fee-based advisory community, or those advisors who preferred a recurring revenue stream rather than commission-based income. At the same time, there was a growing consumer demand for a fiduciary standard in financial dealings. Therefore, Jefferson National has conceived its products with those trends in mind, Caplan says. “I felt if I could find the right platform that was doing that, I could tap into the kind of changes and growth I thought were afoot.”