Prudential Financial is helping to get attention for a relatively new income-creation concept: bolting an annuity spigot onto a client's existing investment portfolio.
The Newark, New Jersey-based life and annuity giant is joining an "insurance overlay" alliance that also includes Dimensional Fund Advisors, an asset manager, and Fiduciary Exchange LLC, the parent of the FIDx insurance exchange. FIDx wants to add an insurance overlay section to its exchange.
FIDx CEO Rich Romano said the goal was to make it easier for advisors to add a protected lifetime income feature directly to a client's managed account.
The alliance could get a boost from a new Internal Revenue Service letter ruling confirming that the IRS thinks a contingent deferred annuity contract is an annuity contract.
What it means: Insurers have been promoting high-profile projects to help 401(k) plan savers add annuity spigots to their retirement plan accounts.
Now, insurers are putting more muscle behind efforts to help individual investors sip from their portfolios through income spigots.
The history: A managed account is a traditional, customized investment portfolio made up of stocks, bonds, funds and other types of assets.
Traditionally, advisors have helped clients add insured income protection by rolling part or all of a client's assets into an annuity. The insurance overlay strategy can add annuity-based protection to a portfolio, for a fee, without the need to move the underlying portfolio assets.
Life insurers have been trying to develop insurance overlay mechanisms based on the "contingent deferred annuity" product framework since at least 2011. Insurance regulators think of them as being a stand-alone guaranteed living withdrawal benefit feature.
Relatively small insurers have been trying to sell contingent deferred annuities since around that time.
Barriers to increased sales of contingent deferred annuities have included concern about how the Internal Revenue Service would see the annuities, the annuity market turmoil caused by the low interest rates that were in effect from 2012 through 2022, the relatively small size of most of the contingent deferred annuity issuers involved, and investment advisor caution.
The future: One force that's helped keep the annuity spigot concept alive is the interest of annuity theorists, designers and distributors in the concept.
RetireOne has been supporting the annuity concept by working with Midland National to offer the Constance CDA contract for years.
The IRS may have helped by issuing the Dec. 27 letter ruling assuring the company that requested the ruling that the contingent deferred annuity contract it proposed would be treated as an annuity for tax purposes.
The letter does not name the company that would issue the annuity.
Prudential's involvement: Prudential showed interest in the contingent deferred annuity from the start. David Blanchett, the head of retirement research at Prudential's PGIM DC Solutions, recently wrote an article suggesting that contingent deferred annuities could help savers meet income needs in retirement.
A company subsidiary filed a registration form for a contingent deferred annuity with the U.S. Securities and Exchange Commission in December.
The company emphasizes in the contract summary that consumers should work with financial professionals when purchasing the products.
"Contingent deferred annuity contracts are complex insurance vehicles," the company says. "You should speak with a Financial Professional about the Contract's features, benefits, risks and fees, and whether the Contract is appropriate for you based upon your financial situation and objectives."
The Prudential subsidiary notes that the contract does provide income protection but does not protect the value of the underlying account assets.
The company emphasizes that the contract is not appropriate for all consumers.
"This Contract may not be appropriate for you if you expect to take frequent or large Non-Income Withdrawals from your Account during the Pre-Income Stage," the company says. "Non-Income Withdrawals may significantly reduce the value of your future benefit."
The contract may also be inappropriate for consumers who expect to take excess withdrawals from an account during the income stage or who expect to use account value for a financial need other than generating retirement income, the company says.
Credit: Who is Danny/Adobe Stock
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