Innovative Retirement Income Planning Products: Complementing Annuities with Target Payment Funds

In a sweet irony, immediately following the scathing remarks by Professor Zvi Bodie of Boston University during the general session regarding target retirement date mutual funds, three executives from Fidelity Investments led a breakout session discussing their new Fidelity Advisor Income Replacement Funds. These funds are designed to create a reasonably stable inflation-adjusted payout and asset drawdown for retirees.

The Fidelity executives answer to Professor Bodie is that people need to take risk in order to make retirement more affordable. The Income Replacement Funds attempt to manage risk by changing the majority allocation from stocks to bonds to the money market over time. The fund prospectuses describe annual target payout rates that the funds attempt to achieve, with the depletion of the fund at the end of the prescribed time period. There is a series of funds with a sequence of final payout dates. The goal of the funds is to integrate the asset allocation and withdrawal strategies to control payment variability and provide the potential to beat inflation.

This appears to be the next generation and a logical extension of the popularity of target retirement date funds. Do you believe that target retirement date funds have been good for advisors and consumers?

The State of Fixed Annuities: Suitability, Designations, Marketing, and Media Relations

Ted Kennedy of AIG American General provided updates on a number of governmental actions. Perhaps the most interesting is that the industry expects the SEC to make some sort of declaration by the end of 2008 regarding fixed indexed annuity regulation. This could help our industry by providing some additional clarity that has been lacking since NASD Notice to Members 05-50.

Kennedy also noted that he does not see an optional federal charter as an option for our industry in the short term, but it may be in the long term. Federal regulation of insurance was included in the Secretary of the Treasury’s recent proposal to overhaul financial regulation in the U.S.

Mike Tripses of Creative Marketing International Corporation talked about some of the media and perception challenges facing our industry. One is that the securities industry seems to have been successful in casting stock mutual funds as being safe. This is in complete contrast to the advice of Warren Buffett, who says to only put money in stocks if you are willing to lose half.

Tripses spoke about the additional risks faced by people who are drawing down their money after retirement. The risks are different in distribution than they are in accumulation. The sequence of returns is a much more important risk in distribution.

The most poignant media attacks against annuities are lack of disclosure and exploitation of seniors. On Sunday, April 13, Dateline NBC is running a segment on annuity sales and exploitation of seniors.

Tripses sees product design changes occurring as a result of these attacks. He believes that in the near future, products that require annuitization will no longer be offered. He also feels that we need to have several goals as an industry: to eliminate agent deception and incompetence, and to promote proper product disclosure and low pressure sales tactics.

Have you seen the Dateline NBC segment? What effect do you believe it will have on the industry?

Session 3.4: Market Conduct and Best Practices for Fixed Annuity Sales

Paul McGillivray of Creative Marketing International Corporation moderated this session, which had an interesting format. The format was that McGillivray asked a series of eight questions and asked a pair of panel members to comment on each one. The panel consisted of himself, Fred Cowley (a producer), Nicholas Gerhart of American Equity, and Eric Thomes of Allianz. Each of them is involved in some aspect of the fixed indexed annuity market.

Some interesting observations that came out were:

• There is no central industry database for carriers to report rogue agents, thus these agents are easily able to move from carrier to carrier and from one marketing organization to another.
• California at one point proposed legislation that would declare fixed and fixed indexed annuities to be unsuitable for all consumers age 65 and older.
• Allianz now calls all annuity purchasers who are age 75 or older to confirm that they know they bought an annuity and are aware of how long is the surrender charge.
• One vexing problem for the industry is that many agents simply omit carrier and product names in their advertising, then think they can say whatever they want without carrier approval.

What recent steps have you seen carriers or agencies take to tighten their suitability procedures? How do you think that we as an industry can get the upper hand in the public relations arena?

Session 2.1: Internal Replacements, or Why Can’t My Client Switch?

The speakers spoke about the vexing challenges associated with internal replacements.

Naomi Weinstein with AXA Equitable spoke about SEC rules that govern when a registered product is exchanged for another registered product by the same provider. SEC rules require that the contingent deferred sales charge (surrender charge) duration on the new contract be measured from the inception of the first contract. In practice, this typically makes it impossible for a carrier to pay agent compensation on the exchange.

Ronald Ziegler of Transamerica spoke about suitability issues that create legal risks for companies, and he spoke about the problem that proactive exchange programs tend to increase the efficiency of policyholder behavior. That is, you end up with exchanges from customers who otherwise would have done nothing, which increases the cost to the carrier of the exchange program.

Deborah Whitmore of Ernst & Young then spoke about DAC accounting rules, which add another layer of challenge to internal exchange programs.

What successful internal exchange programs have you seen for annuities? Have you ever seen a program that hurt the sponsoring carrier?

Session 1.1: Annuity Living Benefit Trends

Matthew Drinkwater of LIMRA shared some industry sales statistics. In 2007, 91% of variable annuity sales took place in products that offer an optional living benefit. In those products, 77% of purchasers elected a living benefit, with the most popular being a guaranteed lifetime withdrawal benefit (GLWB). 23% of contracts with GLWB’s had withdrawals in 2006. The average buyer of a GLWB was age 61, invested $103,000, and paid an annual benefit fee of 59 basis points.

Executives from LPL, Merrill Lynch, and Wachovia then shared their company’s experiences, which were similar. Trends they saw in new product development were:

• Expanding election ages,
• Richer benefits at a higher cost,
• Rewards for delaying benefits,
• Step ups to lock in gains, and
• Integrated death benefits.

Overall, the executives were very pleased with these product developments. The major concern they expressed was that as the costs of these benefits close in on 1% or higher annually, they are concerned that the total costs built into these products are perhaps becoming excessive.
We are starting to see living benefits become common options on fixed indexed annuities. Do you see these products as viable options for consumers?

General Session, April 10 – Leading a Life of Significance

The second speaker was Joseph Jordan, an executive with MetLife. He reminded us of the value of what our industry provides. The life insurance we provide protects families in their time of need. Long term care insurance is about preserving dignity in old age. Annuities also are a form of insurance, in that they are about retiring with dignity.

Jordan noted that with the demise of defined benefit plans, we have de-annuitized our society. We have shifted longevity risk to individuals, and they are not able to handle it. In the phase of our lives where we are drawing down our assets, two keys risks are the sequence of returns and the length of life. Neither of these risks is well understood by individuals. Interestingly, immediate annuities can use mortality pools as a new source of energy to increase retirement income without requiring investment risk.

Jordan’s key point was that we protect people from nasty consequences, and doing that is what allows us to live a life of service and significance. We need to always keep sight of that as our primary purpose.

What is your story about how you came to understand that what we do in this industry is truly important?

General Session, April 10 – Through the Looking Glass

The first speaker during the April 10 General Session was Fred Goldberg, a tax lawyer with Skadden, Arps, Slate, Meagher & Flom LLP. He talked about the perfect economic storm headed our country’s way.

The first ingredient is the social safety net provided by our government. More than half of federal government spending is Social Security, Medicare, and Medicaid. These together are more than double our national defense spending, and we have two wars going on. Now throw in the mix the aging of the baby boomer population. Through Social Security, Medicare, and Medicaid, there is a $53 trillion unfunded liability for the baby boomers. By the year 2015, health care spending alone will equal the size of federal government spending today.

The second ingredient is that the tax burden is being shared by relatively few people. The top 1% of earners pay 30% of all income taxes. About 40% of working families pay no income tax whatsoever. He noted that currently, the tax code provides incentives for charitable contributions, 401(k) contributions, mortgage interest, and the inside build-up on annuities and life insurance policies. Increasingly, these tax incentives are being viewed in Washington as an unjustifiable subsidy for the rich. Thus, the tax favored status of our industry’s products will be under constant attack.

The third ingredient is a series of facts that limit our options: the U.S. currently taxes corporate income at a higher rate than most countries, the disparity of wealth between the rich and the poor in the U.S. is more extreme than it has been since the 1920’s, and we have a negative national savings rate.

Goldberg did not provide any answers, but he certainly laid out the challenge facing our country today. How would you solve our country’s impending health care and retirement challenge?

The State of Fixed Annuities - Addressing Misconceptions

It’s probably safe to say that there are a lot of misconceptions about fixed annuities out there among the general public, the media, and other groups. Mike Tripses, President of Creative Marketing, would like to see the members of the insurance industry address these misconceptions and become crusaders for the products we represent and the clients we serve. In the audio interview posted below, Mike outlines what he will cover in his breakout session (4.4) The State of Fixed Annuities: Suitability, Designations, Marketing and Media Relations. How have we ended up in a position where there are so many attacks on the products that are available today? How much of it is perception about the products and the individuals that represent them versus the reality? How much of it is a need for education?

Are we doing all that we can as an industry to defend and promote our products? According to Mike, the answer is no. He believes that we need to go out and proactively educate all of the constituents. What are your thoughts?


MP3 File

You Can’t Take Your Annuity with You…

There is a session on Friday, 5.1 – You Can’t Take Your Annuity with You…, that will be lead by Michael Berry, CFP, Manager, Advanced Annuity Sales, ING. Below is a short preconference interview we record with Mike about the session. This should be an interesting session as the plan is for the panelists to cover the various retirement income and wealth transfer strategies where annuities have become popular. Mike thinks this will be a great session to hear a discussion about how products may look the same from carrier to carrier, but there are many differences between the company contracts and how tax codes are interpreted. What are your thoughts on how annuities can fit a client’s retirement and wealth transfer planning needs?


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Market Conduct & Best Practices - Interview with Nick Gerhart

We had the opportunity to interview Nick Gerhart, American Equity Investment Life Insurance Company’s Vice President of Compliance Communications, a few days before the conference’s start. Nick will be a Panelist for session 3.4 – Market Conduct and Best Practices for Fixed Annuity Sales. Listen to this short, 1 minute and 49 second interview with Nick below.

Some of the topics Nick and the rest of the presenters are planning to cover during the session have to deal with where the insurance industry is headed when it comes to market conduct and what the media’s perception is concerning fixed annuity sales market conduct.

What are your thoughts on the topic? Do you think the media is fair when it comes to reporting about market conduct issues? Is the industry doing enough to address issues concerning market conduct? Click the ”Add Comment” link below to post a comment.


MP3 File

This seems like it will be an interesting session during the Retirement Industry Conference. Nick mentioned that they will also being discussing point-of-sale best practices as well. Check back later for more discussion on the topic - live from the conference.