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CD Issuers Will Keep Struggling to Match Annuity Rates: David Lau

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What You Need to Know

  • The annuity distributor talked about bank asset-liability matching during a recent conference.
  • David Blanchett of PGIM DC Solutions said that more in-plan annuity options are coming.
  • Michael Finke, a wealth management professor, scoffed at turning passive retirement savers into active retirement income managers.

An annuity distributor, David Lau, predicts that life insurers will continue to have a relatively easy time beating bank certificate of deposit interest rates.

Lau made that projection in October, during a LIMRA annual conference session in National Harbor, Maryland.

Lau said the mismatch between the liquid customer assets held in checking accounts and savings accounts and the bank assets in 30-year, 3% mortgage loans will limit most banks’ ability to push CD rates much higher for the foreseeable future, according to a recording of the conference posted behind a paywall by LIMRA.

What it means: Clients looking for safe retirement savings products might continue to find that annuities pay higher rates.

Lau’s views: Lau is the founder and CEO of DPL Financial Partners, a company that develops and distributes commission-free insurance and annuity products.

He appeared on a retirement income communications panel at the conference along with David Blanchett and Michael Finke.

Blanchett, head of retirement research at PGIM DC Solutions, said he’s excited about employers’ level of interest in offering in-plan annuities and other tools for participants who will have to convert their plan assets into retirement income.

“I’m incredibly hopeful that we’ll see more innovation in that space in the near future,” Blanchett said. “More acceptance among plan sponsors. More products are coming.”

Finke, a professor of wealth management at the American College of Financial Services, talked about the idea of telling clients who’ve been contributing to target-date mutual funds their entire working lives to suddenly make complicated decisions about optimizing withdrawals once they retire.

“We’ve divorced them as much as possible from having to make active decisions about their investments, and then, they get to retirement, and say they’ve got half a million dollars,” Blanchett said “We sort of dump the half a million dollars on their lap and say, ‘Good luck. You figure out what to do with this, even though you haven’t actually been actively investing your money.’”

Lau argued that the annuity industry is already moving toward fee-based advisor and agent compensation, and away from commission-based compensation.

Paying fees helps eliminate compensation-related conflicts of interest that have traditionally kept investment managers from recommending annuities, he said.

The real obstacle to advisor acceptance of annuities has been “what RIAs have historically called ‘annuicide,’” Lau said “You use annuities, you’re going to kill your practice. Because you’re going to lose revenue. So, with the advent of fee-based annuities and the ability to actually bill fees, you’ve at least taken away a fundamental conflict of interest.”

CDs vs. Annuities

During a question-and-answer period toward the end of the panel discussion, Lau talked about the plight of bank CD program managers.

An audience member asked about competition for annuities from bank CDs. The audience member suggested that banks will soon increase their CD rates to compete harder with the crediting rates on multi-year guaranteed annuities if the closely watched interest rates that the Federal Reserve Board controls stay over 5%.

Lau disagreed, noting that life insurers tend to have less liquid products and better asset-liability matching than banks, and banks have trouble balancing their obligations to checking account customers with their mortgage-heavy investment portfolios.

When interest rates in the outside world shoot up, “their deposit products, their liabilities, can’t rise with that,” Lau said. “The interest rates went up too fast. So, because of that, they’re not asset-liability matched.”

Lau observed that any increases in CD rates mean that banks’ CDs will be competing with the banks’ own checking accounts.

“If their money flows out of those low-yielding liquid products into a longer-duration, higher-value CDs, they’ve got to realize losses on their balance sheet, which becomes a vicious cycle if you start getting a run on that money,” Lau said.

David Lau. Credit: DPL


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