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Great Ferment on the U.K. Retirement Scene

Posted on September 22, 2010 by Editor Test -

If HM Treasury decides to re-make the British pension system and remove the requirement that Britons buy annuities with their remaining tax-deferred savings at age 75—a requirement analogous to our Required Minimum Distributions—then the makeover shouldn’t stop there, says a major U.K. third-party administrator.

Xafinity Paymaster, a pension, payroll and annuity recordkeeper that currently makes payments to 600,000 annuitants each year for U.K. insurers, wants the British government to require that every retiree be provided with the three highest comparable annuity quotations, as well as compulsory use of a common annuity questionnaire and application form.

It also wants the creation of an independent advisory body for annuitants along the lines of the Citizens Advice Bureau to provide specific advice to individuals at retirement and believed this could form part of the National Financial Advice Service.

Keith Boughton, Xafinity Paymaster’s director of insurance and payroll, suggested allowing all retirees the right to two half days off work within six months of retirement to get dedicated retirement advice either from their own financial adviser or a government/industry sponsored one.

“The government has the opportunity to overhaul completely the retirement process, which could at a single stroke benefit tens of thousands of retirees,” he said. “The ability for retirees to shop around for the best pension at retirement via the OMO (open market option) has only been partly successful, and we believe that pension scheme providers must be compelled to provide the three best quotes; and this should be supported by a level of free and independent advice to individuals at retirement.”

Century Bonds Illiquid: Towers Watson

Posted on September 22, 2010 by Editor Test -

Towers Watson has argued that pension funds have little to gain from investing in centenary bonds, as the often small issuance results in an inherently illiquid market, IPE.com reported.

Rabobank in the Netherlands recently announced it would issue $350m (€267m) worth of 100-year bonds with a 5.8% interest rate, with a dozen investors from Europe, the US and Asia contributing funds.

However, Geert-Jan Troost, an investment consultant at Towers Watson, said that while these bonds can serve as a “great” diversifier from a liability point of view, there were a number of issues to consider.

“The first is liquidity in the secondary market,” he said. It looks like a large issue because there is not much comparable around. If your pension fund is lucky enough to acquire some of these bonds, what would be the reason to sell it? Once these things are sold, there’s a very illiquid secondary market.”

Troost said the problem for Europeans investing in the Rabobank bonds was the mismatched currency. He argued that, while over a long period it should be an effective investment, in the short term, no guarantees could be made that the US dollar and the euro would evolve at the same pace, resulting in a mismatch in liabilities.

“It is written nowhere that, in the short term, which can be several years, the US dollar curve would move in the same direction and extent as the euro curve,” he said. “The euro curve is, of course, where the liabilies are discounted against. In our studies, for instance, we completely discard any investments that are done in dollars for reasons of duration matching because you don’t want to match your durations and be vaguely right in 10 years’ time.”

Troost said an interesting alternative investment would be the recent zero-coupon version of 50-year bonds issued by the French government. “That’s not a bad alternative relative to the 100-year bond, which probably has a duration that is quite comparable,” he said.

‘Annuitize Part and Invest the Difference’

Posted on September 21, 2010 by Curtis Cloke -

After reading in Retirement Income Journal about the recent government hearings on so-called 401(k) annuities, it amazes me how often the proverbial myths of “loss of control” and no “liquidity” continue to be spewed about the use of annuitization. The reality is that annuitization, properly positioned, gives retirees more liquidity and more control over their money.

Those who favor guaranteed lifetime withdrawal benefits (GLWBs) on deferred variable or fixed indexed annuities typically focus on the “life only” feature of income annuities. But that is rarely the most optimal or appropriate annuitization option. By using Period Certain, Life or Joint Life with Period Certain, or Installment Refund payouts, retirees can often create income solutions that require even less investment than GLWBs to produce the same level of income.

Those options are the foundation of what I call the “Annuitize Part and Invest the Difference” story.

Many of the single-premium immediate (SPIA) and deferred income (DIA) annuity contracts that my clients purchase allow “living commuted value” to the annuity owner. This means that the annuity owner has the option of withdrawing cash from the annuity if he or she decides, at some future date, that liquidity is more important than preserving the income stream the client originally purchased.

The liquidity options of these living commuted withdrawal options usually have some limitations or restrictions. But the same can be said of deferred annuities with GLWBs, which may have surrender periods or roll-ups that are cancelled by withdrawals.

Since the income annuity may cost less (to generate the same amount of income) than a deferred annuity with a GLWB, the remainder of the portfolio isn’t hostage to those restrictions. It can be used for additional liquidity or potential long-term growth without harming the future income stream. The longer the client can let the unfettered asset to grow, the more liquidity they can provide.

At the same time, thanks to the Period Certain feature, much of the future income from the contract annuity comes back either to the owner or the heirs. When the Period Certain is combined with a Life or Joint Life option, the contract owner earns “mortality credits” that bring income up to the same level as the income stream from a GLWB.

The argument for the deferred variable (or fixed indexed) annuity with a GLWB is that the entire sum is liquid. This is a Catch-22. I call this type of thinking “psychonomics,” not economics, because the liquidity comes at a severe price. The anticipated level of income shrinks if too much of the money under the income rider is withdrawn.

Under the typical GLWB, if a retiree withdraws more assets in a single year than the contract permits, it diminishes the benefits. The “Annuitize and Invest the Difference” option, on the other hand, creates liquidity that does not cannibalize the income or consume the portfolio—as long as the client’s combination of income annuities and at-risk investments are properly positioned relative to the client’s age.

In-Plan Income, the Mutual of Omaha Way

Posted on September 21, 2010 by Editor Test -

Executives from Mutual of Omaha didn’t participate in the Department of Labor hearings on “in-plan” or 401(k) annuities in Washington last week. That’s not because they weren’t interested, but because they’ve been too busy implementing the kind of plan that the hearings envisioned.

Starting last March, Mutual of Omaha Retirement Services quietly began offering some of its 5,000 institutional clients, most of whom are sponsors of small and “micro” retirement plans, a voluntary deferred income annuity option called the Lifetime Guaranteed Income Account (LGIA).

So far, says Tim Bormann, Mutual of Omaha’s retirement plans product line director, about 80% of the new plan sponsors who’ve been offered the option have agreed to make it available to plan participants. United of Omaha Life underwrites the product.

“We’re addressing many of the concerns voiced by plan sponsors following the recent market downturn,” Bormann said in a published statement last spring. “We’re removing the ambiguity from retirement savings and reducing risk. With the Lifetime Guaranteed Income Account, a participant’s retirement income will be known, shown and guaranteed.”

The program bears certain similarities to SponsorMatch, the program launched by MetLife in 2009 that combines a deferred income annuity, funded by the employer match, with a participant-directed investment account, funded by the employee’s contribution. And it’s not unlike The Hartford’s Personal Retirement Manager “two-cylinder” deferred variable annuity.

By encouraging the purchase of future income credits, and reporting account balances as both as a lump sum and as a rate of retirement income, programs like MetLife’s or Mutual of Omaha’s accustoms a participant to regarding his or her 401(k) as a source of retirement income rather than as an investment account.

By locking in future income, such a program also maximizes the time value of money and spreads interest rate risk over many years or even decades. From a behavioral standpoint, it will presumably help diminish a participant’s natural resistance to parting with a large lump sum all at once at retirement.

One outside observer thinks the plan reflects progress for the entire field.

“As I understand the product, since the units are purchased on a per paycheck basis, the participants are also essentially dollar-cost-averaging interest rates, and, to a lesser extent, mortality,” said Jay DeVivo, founder of String Financial LLC, a provider of 401(k) participant advice and managed accounts.

“Once this generation of products becomes established and consumers become better educated on concepts such as mortality credits, I’m hopeful that products like ALDAs (Advanced Life Deferred Annuities) that are less flexible but have greater income producing leverage can flourish.”

How the LGIA works

As Bormann explained to RIJ, the process works like this: the 50 investment options under a Mutual of Omaha institutional plan include a Guaranteed Account and the LGIA. Contributions to either account earn a fixed rate that floats from month to month, but every contribution or matching contribution that’s directed to the LGIA—by employer or employee—purchases an increment of future guaranteed income and earns 50 basis points less (as payment for the guarantee).

In 2010, the rate on the Guaranteed Account has ranged from 1.5% to 2.5%. The value of future income is calculated based on an assumed interest rate of 4% and a retirement age of 65. Regarding gender issues, a unisex mortality table is used and the annuity purchases do not trigger Qualified Joint and Survivor Annuity requirements.

“The LGIA actually has two components. There’s the account balance that’s growing at the credited interest rate, and there’s a second guarantee that says, ‘If you put in, say, $5,000 a year, I can tell you exactly how much income you’ll get when you’re 65,’” Bormann said. “The underlying investments in the two accounts are identical. The difference is that the credited interest rate is 50 basis points lower on the guaranteed side.”

The program allows plan sponsors to offer something tantamount to a defined benefit plan. “We’ve had plan sponsors ask, ‘Why don’t I just function like a pension plan, since you’re basically providing a guaranteed amount.’ One strategy we think will be attractive is the concept of offering the LGIA for employer contributions and let them offer a quasi-defined benefit plan,” Bormann said.

In designing the program, Mutual of Omaha anticipated the usual objections to in-plan annuities. For instance, participants can change their minds and move money from the LGIA to another investment option within the plan and back again, with a minimum of 60 days between round trips. In the meantime, however, they lose the guarantee—and the time that their future income could have been growing.

Contributions to the LGIA go into the general account at United of Omaha Life, but the insurer maintains adequate liquidity to allow transfers out of the account. (The cost of maintaining the liquidity is factored into the rate credited to the GA and LGIA accounts.)

At retirement, participants can take a lump sum or buy an income annuity, on whatever payout terms that United of Omaha offers. They can also roll their lump sum into an IRA and purchase an income annuity at The Hueler Companies’ Income Solutions platform. (Mutual of Omaha, along with about a dozen other insurers, distributes its income annuities through the Hueler’s competitive bidding platform.)

If a participant leaves the plan before retirement—as, presumably, many will do—they can preserve their income guarantees when they leave by rolling their LGIA into an IRA. If the plan sponsor decides to change providers and discontinue its relationship with Mutual of Omaha, the LGIA can stay with the plan as a “frozen option,” Bormann said, meaning that it no longer accepts contributions.

As for the typical plan sponsor’s greatest anxiety—that the in-plan annuity provider they choose will someday go out of business, fail to fulfill its obligations and trigger a raft of lawsuits and claims against the sponsor—Mutual of Omaha relies its long history, its survival of the financial crisis without significant damange, and the high level of participant control built into its program, to reassure potential sponsors.

Expressing today’s savings as tomorrow’s income

One of the public policy initiatives discussed at last week’s Department of Labor and Department of Treasury hearings on in-plan options was the introduction of 401(k) account statements that display each participant’s accumulated savings as both a lump sum and a future monthly income.

Mutual of Omaha’s program does that. On their quarterly statements, and at each plan’s website, participants can see their accumulated savings expressed both as a lump sum and as the monthly income stream that they’ve already purchased through the LGIA.

During the hearings in Washington, several plan providers expressed uncertainty about how to express future income—whether to base the figure on the amount already saved or to create projections and estimates based on assumptions about future contributions and rates of return. Some asked the Department of Labor to write guidelines for expressing future income in a fiduciary or compliant manner.

There is some concern that younger participants might be discouraged by the relatively small amounts of monthly income that their past contributions have purchased. Mutual of Omaha has chosen the more conservative route and provided only income that has been purchased, while offering participants an online calculator to test a variety of strategies and assumptions.

“One of the failings of the [retirement] industry is that we’ve focused on the account balance, rather than on how much income the participant will get at retirement,” Bormann said. “We’re trying to get them focused away from the account balance.”

Jay DeVivo agrees. “I think it is important to reorient participants away from a ‘magic number’ they should have accumulated by retirement and toward retirement income, particularly guaranteed retirement income,” he said.

“I think the risk of outliving one’s assets has been so broadly reported and discussed, along with the demise of the pension, that it is no longer an industry talking point, but a risk widely recognized by individual investors. Since the vast majority of retirement savings is done through an employer-sponsored plan—upwards of 80% of IRA assets originate from a DC plan as well—in-plan products and guarantees are going to become the rule rather than the exception.”

Where’s the Scandal?

Posted on September 21, 2010 by Edward Jay Epstein -

The idea that Goldman Sachs, Citibank and other big banks duped Fed officials into buying their distressed pools of debt at 100 cents on the dollar has become a relentless part of the public post-mortem on the financial crisis of 2008.

To be sure, the New York Federal Reserve Bank, using a vehicle called Maiden Lane III, paid billions of dollars to 16 banks for collateralized debt obligations (CDOs) insured by AIG through credit default swaps, and canceled AIG’s contractual responsibility for that insurance. By doing so, the 16 banks got the plunging CDOs off their books and AIG got rid of an albatross around its neck.

But did the Fed really make a deal with the devil?

Opinion makers thought so. Describing the deal in the Times, Nobel laureate Paul Krugman wrote that “Taxpayers not only ended up honoring foolish promises made by other people, they ended up doing so at 100 cents on the dollar,” adding, “By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility—and put the broader economy at risk.”

Eliot Spitzer, the former governor of New York, was even more severe, terming the payments to the banks a “real disgrace.” And during the public hearings held by the Congressionally-appointed Financial Crisis Inquiry Commission in July 2010, commission member Brooksley Born expressed bitter indignation that Goldman Sachs was “100% recompensed on that deal” and that “the only people who were out money were the American public.”

Such charges neglected three pertinent facts. First, the Fed did not pay “100 cents on the dollar.” According to the Fed’s website, it paid $29.1 billion for CDOs with a face value of $62.1 billion, or about 48 cents on the dollar.

Second, U.S. taxpayers did not lose money on the CDOs. The Fed bought these securities very close to their price nadir in November 2008, and they rose in value with the bond rally in 2009 and 2010. In fact, as of September 8, 2010, the Fed has earned a $7.9 billion profit on them—at least on paper.

Third, the CDOs have continued repaying large amounts of principal and interest. To finance their acquisition, the Fed made a $24.3 billion loan to Maiden Lane III. So far the CDOs have paid back over $9.3 billion. At the current rate, the remaining loan will be repaid in less than four years. Meanwhile, the Fed earns interest of one percent above the London Interbank Offered Rate (LIBOR) on the loan.

The outrage over this deal has not focused on the supposed damage to the Fed, or even to American taxpayers. The outrage has been about the lack of damage the deal caused the 16 banks that had bought insurance on their CDOs. These 16 banks wound up getting back roughly their entire insured investment.

But not entirely at taxpayer’s expense. When the market value of the CDOs began plunging in July 2007, and their ratings were downgraded, AIG, which had issued their credit default swaps, had a contractual obligation to send them “collateral payments” equivalent to the drop in the CDO’s market value.

By November 2008, though AIG teetered on bankruptcy from making these payments, the 16 banks’ actual exposure on the CDOs was only their depressed market value. When the Fed bought back the CDOs at their market value, the banks got back what remained of their insured investment.

As Macaulay observed, the Puritans objected to the sport of bearbaiting not because it hurt the bear but because it gave pleasure to spectators. In the Fed bailout, the critics complained that the banks, especially Goldman Sachs, did not suffer enough pain.

Critics pointed out, correctly, that the U.S. government had the power to force the banks that received TARP funds to accept less than market value for the CDOs—or take a “haircut,” in the parlance of Wall Street. Such a haircut would have allowed the Fed to earn even more than it eventually did on the appreciation of the CDOs. AIG, which was the Fed’s junior partner in the profits of Maiden Lane III and is now 79.8% owned by the U.S., would have benefited as well.

But such an accommodation, if it took place, would have required the agreement of all 16 banks, raising a problem. Twelve of the 16 banks were foreign-owned and held approximately two-thirds of the AIG-insured CDOs. These banks had little incentive to accept anything below the market price for their CDOs because their AIG insurance coverage was still in force.

Indeed, the French bank Société Générale SA, which was the single largest holder of AIG-insured CDOs, informed the Fed that its regulators in France would not permit it to sell the CDOs below their market value and that it could not legally accept a haircut as long as AIG was solvent. This position, which other European banks took, ruled out a voluntary haircut.

The Fed could still have exercised the nuclear option: letting AIG go bankrupt. But such a move would have released the evils of a Pandora’s box—not because AIG, with a trillion dollars in assets, was too big to fail, but because it was too interwoven into the fabric of the global financial system.

AIG’s subsidiaries, operating in 130 countries, insured a large part of the commerce flowing between China, North America and Europe. Their seizure by state and government regulatory authorities could have paralyzed world trade and caused a panic among the insured. In the U.S. alone, AIG insured 30 million people. The billions of dollars worth of state and local funds in its guaranteed investment programs would have been frozen.

An AIG bankruptcy could cause an even greater financial crisis abroad. European banks depended on AIG’s French subsidiary, Banque AIG, for the “regulatory capital” they needed to meet government-mandated capital-to-debt ratios. AIG performed this feat through complex derivative swaps. A bankruptcy, or even change of ownership in Banque AIG, would require major European banks to call in hundreds of billions of dollars in loans.

Rather than risk financial Armageddon, the U.S. government decided to save AIG. The Fed now could hardly threaten to put AIG into bankruptcy to pressure the banks to take a haircut. So Goldman Sachs, Société Générale, Citibank, JP Morgan Chase and the other counter parties won their huge bet on CDOs. They bet not merely on the securities, or even on AIG’s solvency, but that, even if AIG’s obligations exceeded its means, the U.S. government would not allow AIG to fail. That assessment was correct.

But the Fed, which financed the purchase of the CDOs from the banks, also did not lose. The market price that the Fed paid for the CDOs at the depths of the crisis—48 cents on the dollar— turned out to be much less than their actual value. So the Fed now stands to make a multi-billion dollar profit.

AIG of course lost heavily, with the U.S. Treasury getting almost 80% of the company. But that is the consequence of a bad bet: that CDOs would not be downgraded and plunge in value. Whether or not the U.S. recoups its investment in AIG is still an open question. But, by saving AIG, the Fed prevented the collapse of the international financial system. So where is the scandal?

Quote of the Week

Posted on September 16, 2010 by Editor Test -

The Pros and Cons of 401(k) Annuities

Posted on September 16, 2010 by Editor Test -

The prominence of the witnesses testified to the significance of the DoL/Treasury Department hearings this week on so-called “401k annuities” and other tools that can help plan participants turn their savings into income–either while they save, when they reach retirement, or in retirement.

Delegates from the retirement industry’s A-list made statements, including (in addition to those mentioned in today’s cover story) JP Morgan, TIAA-CREF, Lincoln Financial Group, Great-West Life, Dow Chemical, Honeywell, Hueler Companies, Vanguard, Nataxis Global Asset Management, Financial Engines, and consultants Towers Watson, Milliman, and Hewitt.

Many of these companies have introduced in-plan income products already. TIAA-CREF pioneered the group variable annuity in the 1950s. Vanguard and Hueler announced an agreement last week to give Vanguard IRA owners access to Hueler’s online SPIA supermarket, which provides institutionally priced income annuities to participants in 1,200 plan.

Prudential Retirement and Great-West offer stand-alone guaranteed lifetime income riders to participants with target-date funds. Financial Engines expects to offer an in-plan option in late 2010 or early 2011. Asset managers Vanguard, Fidelity, Putnam and Russell all sell payout mutual funds, which deliver predictable but non-guaranteed income streams.

Trade, labor, and consumer advocacy groups also contributed their thoughts. The AFL-CIO, the Investment Company Institute, the Profit-Sharing and 401(k) Council of America, the American Council of Life Insurers, the American Society of Pension Professionals and Actuaries and the Spark Institute all gave testimony. Other groups and firms can contribute statements via e-mail over the next month.

Some witnesses praised in-plan annuities, while others, like Steve Utkus of Vanguard, tried to bury them. To be sure, there are plenty of good reasons for putting income options in plans, either as savings vehicles (deferred annuities) or exit options (immediate annuities, payout funds).

Big plan sponsors have economies of scale and bargaining power that lower the costs of products, administration, and education. Plan sponsors are also in a unique position to set up a program that applies the employer match to the purchase of future income—a path that MetLife and Mutual of Omaha are pursuing. Like contributions to a defined benefit plan, that kind of program would leverage the time value of money and mitigate the interest rate risk and timing risk associated with the lump sum purchase of an annuity at retirement.

Counter-arguments

But there are plenty of many counter-arguments for putting annuities in DC plans. For plan sponsors, there are potentially huge expenses associated with evaluating the costs and benefits of different income product vendors and in educating employees. Above, all liability for picking the wrong provider or for giving employers bad (in retrospect) advice scares them. “Fiduciaries are paranoid and rightly so,” says Sheldon Smith, an ERISA attorney and president of ASPPA.

As for participants, most of them won’t retire from their current employer/plan sponsor. From the participant perspective, the average person spends only 4.2 years in any particular job and might participate in several 401(k) plans. There are also portability issues. Participants may want to change employers or get out of income products. Employers may want to change annuity providers.

Adapting recordkeeping systems to multiple income options, or options that might change suddenly, could also pose problems, especially for small employers. Ninety-percent of plans have fewer than 100 participants. Only the largest 10% of plans, which account for 85% of all participants, may be able to cope with the legal, educational, and recordkeeping challenges of in-plan options.

Other problems: most 401(k) accounts, even at retirement, are too small to annuitize at all, let alone big enough to allow for the ideal solution: partial annuitization. Annuity purchases can also trigger the need for spousal approval, potentially increasing paperwork for sponsors. Gender-neutral pricing rules in 401(k) plans also mean that retail annuities, which have gender-specific pricing, can offer men much higher payout rates than in-plan annuities.

Alternate vision

The zeal for putting guaranteed income options in DC plans is limited mainly to insurers. Asset managers like Vanguard and Fidelity, which are the custodians of millions of rollover IRAs, believe that most people will consolidate their tax-deferred savings in an IRAs and then buy an annuity—or simply take systematic withdrawals. Investment advisors think along the same lines, and millions of Americans are likely to take this path.

Even if you build in-plan annuities, will they come? There’s a lot of disagreement over whether Americans want in-plan annuity options. Even in DB plans, 90% of retirees who have the option choose lump sum payouts over lifetime income streams. Shlomo Benartzi of UCLA, and an Allianz Life consultant, cited evidence of high annuitization rates in some companies, and MetLife said participants like a partial annuitization option. But the evidence is inconsistent. Most people don’t want to give up control over their assets or even part of their assets, especially not at time they stop working, when their retirement plans are still unsettled.

There’s also the crowding-out problem. Thanks to Social Security, most middle-class plan participants will get at least half of their retirement income coming from an annuity, and have no compelling reason to annuitize their DC savings. On the contrary, they may need their DC assets to stay liquid for emergencies, bequests, weddings or simply long-deferred pleasures.

To overcome this resistance or inertia, some witnesses said, the government might have to approve a qualified default annuity option, analogous to auto-enrollment and the qualified default investment options in 401(k) plans. One witness, Josh Shapiro of the National Coordinating Committee for Multiemployer Plans, asserted that nothing short of mandatory annuitization of DC assets at retirement will really change the game. The DoL and Treasury, as well as sponsors and plan providers, have already ruled that out.

In Search of Safe Harbors

Posted on September 15, 2010 by Editor Test -

Of the many gnarly reasons why so few 401(k) participants have access to ‘in-plan’ lifetime income solutions, the biggest obstacle may be the plan sponsor’s fear of lawsuits from participants if the sponsor’s chosen annuity provider ever went broke.

“The fiduciary issue is so daunting that it ends the conversation,” said David Wray, the director of the Profit Sharing and 401(k) Council of America, a trade group for plan sponsors. “Sponsors ask, ‘We’re guaranteeing payments for 30 or 35 years?’ It stops the conversation. It’s a wall.”

It’s a wall that executives at many insurers and other financial services firms would love to see breached or demolished. That’s why so many of them told a Department of Labor panel Tuesday that the DoL should identify a process or path—a ‘safe harbor’—by which they could choose an annuity provider without liability.

“The government has to stand behind us when we stand behind a decision,” Wray said. “There has to be confidence that someone will make sure the annuity payments keep coming, and it’s not the employer.” Lest the panel miss his point, he added, “If one of these programs goes down, the political fallout will be significant.”

“Fiduciaries are paranoid and rightly so,” says Sheldon Smith, an ERISA attorney and president of ASPPA.

A safe harbor already exists, but plan sponsors and others say it leaves many questions unanswered. Is the fiduciary duty the same for all types of income products, guaranteed and non-guaranteed? How often would the company have to check the strength of the provider? Can companies change their minds and switch providers without exposure to liability?

Insurers say that their strength ratings are available for anyone to see. But, in the wake of the financial crisis, sponsors aren’t so sure they can rely on the ratings agencies or the oversight of state insurance commissioners.

Aside from a clearer fiduciary standard, insurers, asset managers and others asked the Departments of Labor and Treasury for the following:

Provide safe harbor for advice about retirement income. Plan sponsors want to see the rules on investment advice broadened, so that sponsors can educate participants about retirement income options without future liability for poor participant choices, and so that sponsors can use plan assets to pay for the education.

Encourage partial annuitization. One of the big obstacles, real or perceived, to the use of income annuities is that participants can’t annuitize part of their plan assets or don’t know that they can choose to annuitize only a portion of their assets. Witnesses asked the government to work to encourage partial annuitization.

Provide guidance on expressing savings as retirement income in participant statements and websites. Many witnesses argued that showing plan participants how much retirement income their plan assets will buy, instead of just showing them their current account balance, would motivate people to save more and help them appreciate that their account’s purpose is to provide retirement income, not wealth accumulation. They requested DoL guidelines for providing such illustrations in a compliant way. Since so many variables go into making projections about retirement income, that won’t be easy, however.

Eight Ways to Simplify Retirement Accounts

Posted on September 15, 2010 by Editor Test -

The sections of the tax code that cover tax-deferred and tax-exempt savings programs are a mess—well intentioned perhaps, but a mess. Stop somebody on the street and ask him to explain the tax treatment of Roth IRA withdrawals. You might as well ask directions to Maracaibo.

People in high places have been thinking about cleaning up this mess. A thick new whitepaper called “The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation,” includes at least eight ways to rationalize the rules governing the hodge-podge of programs that we know as IRAs, FSAs, HSAs, 401(k)s, 403(b)s, 529s, SIMPLE-IRAs, SARSEPs, etc.

The report contains both good and bad news. The good news is that lots of interesting alternatives to the status quo exist—like making contribution limits the same for on IRAs and 401(k)s, or letting half the people skip their Required Minimum Distributions.

The bad news is that any change the tax law will inevitably gore somebody’s ox. What one person sees as the elimination of a wasteful and ineffective tax incentive will strike other people as a confiscatory tax hike. And no matter what happens, unintended consequences are likely follow.

But something apparently needs to be done. According to the report, the government “spends” $118 billion a year on tax-deferred retirement, health care and education accounts, but the wrong people are using them. Of the $118 billion in uncollected taxes, 84% stays with people who make $100,000 or more a year. That’s not the kind of social engineering this administration is aiming for.

Here are the eight suggestions:

Consolidate Retirement Accounts and Harmonize Statutory Requirements. There’s currently a hodge-podge of related but distinct tax-deferred or tax-exempt savings programs in the tax code, from 401(k)s and 403(b)s to 529s, from IRAs to FSAs and HSAs, and from SIMPLE plans to SARSEPs. They have different rules regarding eligibility, contribution limits, and withdrawals.
Integrate IRA and 401(k)-type Contribution Limits and Disallow Nondeductible Contributions. The advisory board suggested raising the limits on deductible contributions to IRAs (currently $5,000 a year) to the same level as the limit on 401(k) plans. This would eliminate a lot of paperwork for people who currently make IRA contributions that exceed the $5,000 limit. On the other hand, it might reduce tax receipts and would disproportionately favor high-earners.
Restrict use of IRA assets for non-retirement purposes. One of the redundancies of the current system is that people can use the money in their IRAs for certain medical or educational expenses instead of retirement. The advisory board recommends imposing strict limits on the use of funds in retirement saving accounts for non-retirement purposes. Taxpayers would instead be encouraged to use 529 Plans for college savings and HSAs or FSAs for medical bills.
Clarify and Improve Saving Incentives. The report proposes an expansion of the existing Saver’s Credit to a match from the government as an incentive to low-income workers to save. The existing credit offers a tax deduction, which doesn’t help low-income workers. The report also proposes an “automatic IRA” rule, which would require employers in business for at least two years and with more than ten employees to default their employees into an IRA and start deducting contributions from their payroll. Employees could drop out of the program if they wished.
Reduce Retirement Account Leakage. Under current rules, it’s relatively easy for people to squander their tax-deferred savings by spending them when they change jobs or by borrowing against them and not re-paying the loans before they change jobs. The report suggested restricting access to 401(k) and IRA money, but acknowledged that restrictions would create paperwork for employers and hardship for some employees.
Relax non-discrimination rules for small plans. Many owners of small companies are discouraged from offering their workforce a 401(k) plan because the rules limit their ability to discriminate in favor of their most-valued employees by contributing more for them than for rank-and-file workers. One solution would be to replace existing non-discrimination rules and apply the rules associated with SIMPLE 401(k) plans.
Eliminate RMDs for small accounts. Eliminating the distribution requirement for those with tax-deferred savings under $50,000 relieve would eliminate the burden of calculating RMDs for half of retirement account owners over age 70½, while exempting only 6% of retirement assets from taxation each year. Today, retirees over age 70½ must multiply their tax-deferred assets by an age-specific factor to determine the amount of savings they must remove from their tax-deferred account(s) and pay taxes on. For people with several tax-favored accounts, the calculation and the decision regarding which account to tap for the distribution can be complicated. One caveat: People with small accounts are the ones most likely to be in circumstances that force them to take distributions each year, whether required or not.
End the ‘Curse of the MAGI.’ Today, retirees must fill out an 18-line worksheet to calculate the percentage of their benefits is subject to income tax. Much of the complexity comes from having to determine whether zero, 50% or 85% of benefits should be included in modified adjusted taxable income (MAGI). The panel suggested a return to pre-1993 system of taxing Social Security benefits and other income separately.

Conservatives might bridle at the suggestion that people in higher tax brackets shouldn’t reap most of the benefits of tax deferral or exemption, or that a tax break is a “cost” and that a failure to collect taxes is equivalent to an expense for the American people. As we’ve seen in the debate over extending the Bush tax cuts, they regard the closure of a tax break as a tax hike.

But there’s a Democrat in the White House, and his administration holds the liberal viewpoint that tax breaks should either pay for themselves by helping to achieve a public policy goal—in this case, by encouraging people who make under $100,000 to save more—or be eliminated. It would probably be politically impossible to eliminate popular tax breaks; a judicious pruning or tweaking might be the only option.

Making a Case for the 401(k) Annuity

Posted on September 14, 2010 by Kerry Pechter -

There’s upwards of $4 trillion in defined contribution plans, and lots of insurers like MetLife, Prudential, and AVIVA and asset managers like Putnam, Russell, and Fidelity Investments sell products that can help participants turn those assets into lifetime income.

To date, relatively few plans offer those products as in-plan ioptions. Plan sponsors don’t want lawsuits from long-departed employees if their chosen annuity issuer fails in 10 or 20 years. And plan participants haven’t exactly been clamoring for annuities.

But the biggest, most innovative 401(k) providers are gearing up for in-plan options. And, with Social Security facing lean years, the Obama administration seems willing to clear away existing regulatory hurdles and help people convert their 401(k)s to lifetime income.

Those vectors intersected in Washington earlier this week, during two days of hearings on in-plan options, hosted by the Departments of Labor and Treasury. The hearings themselves were a sequel to the Request for Information about in-plan options that the DoL and Treasury issued last spring, which elicited a huge response from the financial services industry—and from paranoids who think they see a federal plot to follow Argentina’s example and confiscate private retirement assets.

The hearings were rewardingly comprehensive, but they had a central theme. Many financial services companies want the DoL to create a “safe harbor” for in-plan income products. They want the DoL to bless a due diligence process that, if followed, will enable plan sponsors to choose annuity vendors without fear of participant lawsuits if the vendor—a life insurance company, in most cases—fails. A safe harbor may already exist, but it’s too full of legal loopholes to make most sponsors feel immune to litigation.

It’s too soon to say what will happen. It appears—though no one said it explicitly—that the DoL would like to see middle-class plan participants have access to a variety of low-cost, transparent payout options that they can easily compare. Income product providers presumably want to compete for exclusive or semi-exclusive plan sponsor relationships, and to focus (unavoidably) on participants with big balances. The interests of populism and private enterprise overlap here, but they don’t dovetail.

Depending on a lot of factors—future interest rates, the path of economic recovery, the outcome of the 2012 presidential election—this week’s hearing could mark a turning point in how Americans fund their retirement. One speaker called this a “key juncture” for the DoL. Or its reams of documents could be headed for the shredder.

Vanguard Launches New Index ETFs

Posted on September 14, 2010 by Editor Test -

Vanguard has introduced eight new index mutual funds and nine new exchange-traded funds (ETFs) based on S&P domestic stock benchmarks, including an S&P 500 Index ETF with an expense ratio of only six basis points, an industry low for that type of ETF.

With the expansion, Vanguard offers 55 ETFs, including eight new equity funds as well as ETFs targeting the growth and value segments of the S&P 500 Index and the growth, value, and blend segments of the S&P MidCap 400 and SmallCap 600 Indexes.

Vanguard’s $23 billion in ETF net cash flow through August led the industry. Cash flow into Vanguard’s equity ETFs has been particularly strong, accounting for 74% of Vanguard’s total ETF cash flow and 51% of the industry’s equity ETF positive cash flow, according to Bloomberg. Vanguard’s ETF assets under management have jumped 60% since August 2009, rising from $71 billion to $113 billion.

In the coming months, Vanguard plans to introduce 11 additional index funds with ETF Shares. On the equity side, Vanguard will add a suite of seven funds with ETF Shares to offer exposure to value, growth, and blend segments of the U.S. stock market based on the large-cap Russell 1000 Index series and the small-cap Russell 2000 Index series. A broad market fund and ETF seeking to track the Russell 3000 Index will also be offered.

On the bond side, Vanguard will offer three new municipal bond index funds with traditional and exchange-traded shares, tracking benchmarks in the S&P National AMT-Free Municipal Bond Index series. The expense ratio for Vanguard’s new municipal ETFs is estimated to be 0.12%.

Vanguard has also filed for a new real estate fund, which will be benchmarked to the S&P Global ex-U.S. Property Index. Vanguard Global ex-U.S. Real Estate Index Fund will offer Investor Shares, Institutional Shares, Signal Shares, and ETF Shares.

These planned products will bring Vanguard’s ETF stable to 66 offerings, including suites of domestic stock ETFs based on benchmarks from MSCI, S&P, and Russell.

The Six Emotional Stages of Retirement

Posted on September 14, 2010 by Editor Test -

Americans’ attitudes, ambitions and preparation for retirement have changed dramatically as a result of the recession. Five years after introducing the stages of retirement With its recent study, New Retirement Mindscape II, Ameriprise Financial revisited its 2005 New Retirement Mindscape study to take the emotional pulse of people approaching and in retirement.

The findings register the impact of the financial crisis, he difficult economic environment has had on people. In 2005, the U.S. economy was riding a prosperous high. “Five years later our society is in a very different place, and as a result, consumers are approaching retirement with a different mindset,” said Craig Brimhall, vice president of retirement wealth strategies at Ameriprise Financial.

“The years leading up to retirement used to be filled with a sense of excited anticipation, but now we are seeing people hesitate and really question if they are making the right decision. And in the first year of retirement, a stage once synonymous with feelings of liberation, consumers are facing new doubts, concerns and the reality that retirement may not be what they expected,” he said.

Based on telephone interviews with 2,000 U.S. adults ages 40 to 75 last May, The New Retirement Mindscape II^SM study identified six distinct attitudinal and behavioral stages that occur before and during retirement:

1) Imagination, 6-15 years before retirement

2) Hesitation, 3-5 years before retirement

3) Anticipation, 2 years before retirement

4) Realization, first year of retirement

5) Reorientation, 2-15 years after retirement

6) Reconciliation, 16+ years after retirement

Stage 1: Imagination (six to 15 years prior to retirement) – People in this earliest stage preceding retirement are less “hopeful” (71% vs. 81%) and “optimistic” (72% vs. 77%) than they were in 2005. But 84% feel “happy” and 70% feel “enthusiastic” about retirement, perhaps because they still have time to recover from the recession.

Stage 2: Hesitation (three to five years prior to retirement) –Significantly fewer in the Hesitation stage expect to feel “happy” in retirement than did so in 2005 (82% vs. 92%). Probably because of job setbacks and conflicting financial priorities, fewer in this group have set aside less money in employer-sponsored plans or taxable accounts than in 2005 (74% vs. 91%). They are less likely than those in the Anticipation stage to expect to greatly enjoy retirement (64% vs. 75%) or to save in non-retirement accounts (67% vs. 83%).

Stage 3: Anticipation (two years prior to retirement) – Excitement begins to build in the final two years before retirement day. People in the Anticipation stage are likely to feel “on track” for retirement (77%), possibly because they are also the most likely to be saving and investing (83%) and working with a financial advisor (54%).

Stage 4: Realization (retirement day to one year following) –The optimism and excitement that accompanied this stage five years ago have been muted by the recession. With sharp declines in the value of portfolios, as well as “forced retirements” due to layoffs and career setbacks, many people are struggling. Compared to 2005, far fewer enjoy retirement “a great deal” (56% vs. 78%), say they live their dream (45% vs. 68%) or feel that retirement has worked out as they planned (57% vs. 77%).

Stage 5: Reorientation (two to 15 years after retirement) – Most people enter the Reorientation stage feeling more “happy” (80%) and “on track” for retirement (69%) than in previous stages. They continue to enjoy having “control over their time,” even more than in 2005. More set aside money for retirement (83% vs. 72%) and are working with a financial advisor (43% vs. 34%).

Stage 6: Reconciliation (16 or more years after retirement) – Most people in the Reconciliation stage feel “happy” (80%), but they report more depression than in 2005 (20% vs. 5%). Troubled by the loss of income and social connections, only 56% say they enjoy retirement “a great deal” (56%), compared with 75% five years ago.

9 in 10 VAs Sold With Living Benefits

Posted on September 14, 2010 by Editor Test -

Guaranteed Living Benefit (GLB) riders were elected in variable annuities (VA) generating $20.3 billion of new deferred VA premium in the second quarter, an 18% increase over the first quarter, according to LIMRA’s second quarter study, which represents 95% of the variable annuity GLB industry.

“Guaranteed living benefits remain extremely popular in this uncertain market as consumers seek financial security for their retirement,” said Dan Beatrice, senior analyst, LIMRA Retirement Research. “We believe the GLBs will continue to be an important driver of variable annuity sales in the foreseeable future.”

For the third consecutive quarter, GLBs were elected 87% of the time when any GLB is available for purchase. The guaranteed lifetime withdrawal benefit (GLWB) election rate remained at 64%. Guaranteed minimum income benefit (GMIB) riders were elected 17% of the time; while, guaranteed minimum accumulation benefit (GMAB) and guaranteed minimum withdrawal (GMWB) each had a three percent election rate in the second quarter of 2010.

LIMRA estimates that GLBs were available in contracts generating $23.2 billion of new deferred VA premium during the second quarter. VA assets with GLB decreased three percent from $440 billion in the first quarter of 2010 to $427 billion at the end of the second quarter of 2010; and total VA assets dropped five percent from $1.433 trillion to $1.358 trillion during the same period.

The rate at which any GLB was elected increased one percent in the career distribution (75%) and bank channels (92%); while independent (90%) and wirehouse (90%) channels remained steady.

LIMRA’s Variable Annuity Guaranteed Living Benefit Election Tracking Survey collects VA GLB sales, election rates and assets on a quarterly basis. The 27 survey participants represent 95% of second quarter 2010 industry sales in which a GLB was elected.

Banks Selling More VAs, Mutual Funds

Posted on September 14, 2010 by Editor Test -

U.S. banks saw solid increases in variable annuity and mutual fund revenue for the first half of 2010 but a drop in fixed annuity revenue, National Underwriter reported.

Bank variable annuity revenue was 16% higher during the first half than it was during the first half of 2009, and bank mutual fund revenue was 31% higher, according to Kehrer-LIMRA, a unit of LIMRA, Windsor, Conn. Bank fixed annuity revenue was 27% lower.

The Kehrer-LIMRA report includes 56 banks and credit unions that account for about 40% of the investment revenue at smaller financial institutions.

Investment sales revenue per bank rep fell 37% between 2008 and 2009. During the first half of 2010, bank rep productivity has been 32% higher than it was during the comparable period in 2009.

Similarly, new investment sales revenue per dedicated bank financial rep fell 10% between 2008 and 2009, but that productivity indicator has been 7% higher in the first half of the current year than in the first half of 2009.

Bank investment income per $1 million in total bank revenue fell 12% in 2008, but median investment program revenue increased 5%. That means investment program revenue increased at a majority of the banks, Kehrer-LIMRA says.

For all of 2009, fixed annuity revenue was down 25%, variable annuity revenue was down 21%, and life insurance revenue was up 15%.

Expect Three New Regs by Year-End

Posted on September 14, 2010 by Editor Test -

The Department of Labor has reported that it has three new sets of guidance at the Office of Management and Budget, which suggests that all three will be issued before the end of the year, says Fred Reish, an ERISA expert and managing director, Reish & Reicher, a Los Angeles law firm. “This fall promises to be interesting,” he noted.

• New TDF disclosures. This regulation that would impose new disclosure requirements on target date funds in order to qualify as QDIAs and to obtain the fiduciary safe harbor for defaulted participants. When effective, this will require that additional, meaningful information be given to the participants preceding default. (As a practical matter, participants who elect those investments will be given the same information).

• Fee disclosure regulation for participants. This rule was issued in proposed form by the Bush Administration, but was never finalized. The new Administration has picked up that regulation and developed a final regulation. While DOL speakers are giving little specific information, it appears that the regulation will be similar to the proposal. The burden for complying with the regulation will primarily fall upon recordkeepers and bundled providers.

• An expanded definition of fiduciary. There is little in the way of information about the contents of the regulation. However, it seems clear that it will expand the definition of fiduciary advice and that more financial advisers and investment advisers/consultants will be considered to be fiduciaries. Depending on how far that definition is expanded, it could have a major impact on broker-dealers.

Quote of the Week

Posted on September 14, 2010 by Editor Test -

“The automatic annuitization of retirement balances could help workers achieve a steady stream of income that is guaranteed for life.” From The Report on Tax Reform Options, issued by The President’s Economic Recovery Advisory Board in August 2010.

Jefferson National Offers DFA Funds

Posted on September 8, 2010 by Editor Test -

Jefferson National, issuer a flat $20/month insurance fee variable annuity, now offers access to funds from Dimensional Fund Advisors. Dimensional’s funds are available tax-deferred to financial advisors who use Jefferson National’s Monument Advisor, the number one RIA-sold VA for three consecutive years according to Morningstar VARDS Data.

Through the new offering, advisors can access six funds:

VA Global Bond Portfolio
VA US Targeted Value Portfolio
VA US Large Value Portfolio
VA International Small Portfolio
VA Short-Term Fixed Portfolio
VA International Value Portfolio

Jefferson National’s Monument Advisor offers more than 250 investment options, or five times the number offered by most VAs, the company said, including the most subaccounts with the Five Star and Four Star Morningstar Rating for a second consecutive year.

According to Cerulli Associates, the fee-based advisory market is one of the fastest-growing segments in the financial industry, with assets topping more than $7.2 trillion as of 2008,and more than 65% of brokers surveyed said they would be interested in going independent.

SIFMA Urges Uniform Standard for Advisors, Brokers

Posted on September 8, 2010 by Editor Test -

The Securities Industry and Financial Markets Association (SIFMA) has submitted comments to the Securities and Exchange Commission (SEC) in advance of its study on the obligations of investment advisers and broker dealers.

In comments to the SEC, SIFMA highlighted the following key principles the Commission should focus on during their six month study:

• The interests of individual investors should be put first. When providing personalized investment advice to individual investors, broker-dealers and investment advisers should deal fairly with clients.

• Broker-dealers and investment advisers should appropriately manage conflict of interest by providing individual investors with full disclosure that is simple and clear and allows them to make informed investment decisions.

• Individual investors should continue to have access to a wide range of investment products and services, a choice among financial service provider relationships and options for paying for financial services and products.

• Any standard of conduct adopted by the SEC should reduce confusion about existing legal and regulatory regimes by being the exclusive uniform standard that applies to broker-dealers and investment advisers when providing personalized investment advice about securities to individual investors.

In addition, SIFMA requested that the SEC ensure that broker-dealers be able to provide individual investors with best execution and liquidity as principal and offer proprietary and affiliated products that certain investors desire. As noted in the letter, broker-dealers offer a variety of products on a principal basis, including fixed-income products such as municipal bonds, initial public offerings and other underwritten offerings.

The comment letter can be found at the following link: http://www.sifma.org/assets/0/232/234/124802/bcb2b9b1-5a0f-4f20-bda3-690160807abb.pdf.

Fitch Deems Life Insurers “Stable”

Posted on September 8, 2010 by Editor Test -

Fitch Ratings has upgraded the outlook for the U.S. life insurance sector to stable from negative. The negative outlook was initially assigned in September 2008. A stable outlook for the sector indicates that Fitch believes a vast majority of insurer ratings will be affirmed as they are reviewed over the next 12-18 months.

A special report published today, ‘U.S. Life Insurance Sector: Outlook Revised to Stable’ is available at www.fitchratings.com.

Over the next 12-18 months, Fitch’s primary rating concerns for life insurers include:

Uncertainty over the economic outlook and the potential for a double-dip recession.
Higher-than-expected losses on commercial real estate (CRE) related assets.
Emerging interest rate risk due to historically low interest rates, which are having an impact on industry investment yields, and uncertainty regarding the direction of future interest rates.

The Stable Rating Outlook for the U.S. life insurance sector reflects the industry’s improved balance sheet and operating fundamentals. Fitch notes that sustained improvements in investment valuations and financial market liquidity has resulted in a significant reduction in investment losses, and allowed the industry to raise capital and fund near-term maturities.

Fitch expects that favorable trends in industry earnings performance and investment results in 2010 will continue over the near term, but will continue to lag pre-crisis results due to the lower interest rate environment and steps taken by the industry to lower risk in the investment portfolio by reducing investment allocations away from higher risk, higher return asset classes.

Results in 2010 have benefited from improved interest margins, higher equity market valuations (relative to prior year), and the aforementioned decline in investment losses. Fitch expects the industry’s large in-force variable annuity business to be a drag on profitability over the near term, and could cause a material hit to industry earnings and capital in an unexpected, but still possible, severe stress scenario.

Fitch views the passage of the Dodd-Frank bill earlier this year as credit neutral for life insurers but recognizes that uncertainties remain over the interpretation of several aspects of the bill. Primary concerns include the potential designation as a systemically important non-bank financial institution and its implications, and the uncertain impact on industry sales practices, particularly for registered products.

The outlook revision also considers the positive steps taken by a number of life companies to de-risk their product offerings, reduce reliance on institutional funding sources, and strengthen hedging and other risk mitigation programs.

Since the September 2008 shift of Fitch’s U.S. life insurance industry rating outlook to negative, Fitch has downgraded 35 out of 55 rated U.S. life insurance groups one or more times. Over the same time period, Fitch has upgraded two U.S. life insurance groups. The large majority of the rating downgrades during this period were limited to one to two notches. While ratings of U.S. life insurers have been broadly affected by the financial crisis, the limited magnitude of the rating downgrades reflected the industry’s relatively stable liability structure and strong capital position going into the credit downturn.

Fitch’s sector outlook assumes a continued, albeit weak, economic recovery with modest GDP growth and continued high unemployment levels. Fitch’s outlook does not incorporate exogenous shocks to the economy, and will factor in such events should they occur. Fitch’s expectation for CRE-related investment losses are closely tied to Fitch’s economic assumptions. Fitch continues to believe that the industry’s CRE-related loss exposure is manageable and has been reasonably factored into existing ratings under Fitch’s stress testing methodology.

From the perspective of interest rate risk, over the near term, minimum rate guarantees incorporated in the policyholder accounts of the U.S. life insurance industry will limit the ability of life insurers to maintain interest margins due to low investment yields. Longer term, Fitch is concerned that strategies that life insurers may be using to reach for additional yield will make them vulnerable to disintermediation and asset-liability mismatches in a rapidly rising interest rate environment. Such strategies could include extending portfolio durations and asset-liability mismatches, accepting higher levels of lower rated securities, and amassing sector concentrations.

By Another Name, Annuities Would Smell Sweeter

Posted on September 8, 2010 by Editor Test -

Even though most people like the annuity concept, more than half (53%) of Americans aged 44-75 expressed distaste for the word “annuity”, according to a survey from Allianz Life Insurance Company of North America.

Some 80% of 3,200 people surveyed preferred a product with four percent return and a principal guarantee over a product with an 8% return subject to market risk—thus answering the classic behavioral finance question, Would you prefer a 100% change of $50 or a 50% chance of $100. But they balk at the word, “annuity.”

“No other financial product offers guaranteed income for life. Government, financial planners and the industry need to re-educate the American public about what these products do and how they can help secure a stable retirement,” Allianz Life said in a release.

The study, titled Reclaiming the Future: Challenging Retirement Income Perceptions, found that respondents had decades-old prejudices regarding annuities. Fifty-three percent first formed their opinion of annuities 10-20 or more years ago. Only 27% knew of innovations made with annuities during the past five to 10 years. Only 23% know that variable annuities allow contract holders to participate in market gains.

When people understand annuities, they’re very satisfied with them. According to the study, 76% of annuity owners are “very happy” with their purchase. More than half of owners like the product because it’s a safe, long-term investment vehicle (57%), a great way to supplement their retirement income (56%), and an effective tool to get tax-deferred growth potential (56%). Consumers ranked annuities second-highest (50%) in satisfaction among all financial instruments, beating mutual funds (38%), stocks (36%), U.S. savings bonds (35%) and CDs 25%).

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