It's not that people don't want to save for retirement, it's because they can't afford to.
By Cyril Tuohy
The recent spate of deferred income annuities (DIAs) has swept into the market like a straight-line cluster of summertime derecho storms.
To demonstrate, The Phoenix Companies launched its Income Elite Annuity, a single premium fixed indexed annuity with a guaranteed lifetime withdrawal benefit rider. American General announced the AG Choice Index 10 Annuity with an optional lifetime guarantee living benefit rider. Principal Financial Group now offers a Principal Deferred Income Annuity, which gives investors a flexible premium option while guaranteeing an income floor.
All three companies announced their DIA products this past week, on top of New York Life slashing its initial premium payment from $10,000 to $5,000 for its Guaranteed Future Income Annuity (GFIA).
“Insurers have a great opportunity that provides guaranteed return income,” said Scott Hawkins, vice president and analyst with the financial services consultancy Conning & Co., who authored a report on annuities last year.
The abundance of DIA products are the latest entries in a growing market. Deferred income annuity sales topped $1 billion in 2012, according to LIMRA. While representing a fraction of total annuity sales, consumers ages 45 to 59 own almost $10 trillion in financial assets, so there’s plenty of growth potential for DIAs, LIMRA said in a news release earlier this year.
Life insurers see two windows of opportunity for DIAs, Hawkins said in an interview with InsuranceNewsNet. The first is when retirees turn 65 years old and need to think about converting their 401(k)s and individual retirement accounts into retirement income vehicles. The second is when the retiree turns 70-and-a-half years old and must begin withdrawing their retirement assets pursuant to Internal Revenue Service rules.
The Great Recession also hammered home the security that comes with fixed payment at retirement, not unlike those offered by defined benefit plans that are slowly headed for extinction. “People saw their 401(k)s take a big hit and people [said] ‘Oh my gosh, how am I going to support myself,’ “ Hawkins explained.
In addition, the government has recognized that the 401(k) benefit plan is turning into the de facto retirement vehicle for tens of millions of Americans on the trailing end of the baby boom and the generations behind it, he said. So the challenge is how to make those individual retirement accounts hedge against longevity risk and last as far into the future as possible for millions of retirees with lengthening life expectancies.
“People are struggling with new retirement realities – many do not have enough money saved to last their entire lifetime, retirement costs continue to rise and the market has been especially volatile over the last decade,” said Rob Scheinerman, chief product officer of AIG Life and Retirement, of which American General Life is part, in a news release.
Lowering initial premium payments, said Matt Grove, senior managing director for New York Life, is a way to make DIAs more attractive to younger investors.
“We believe this new lower initial premium payment will open up this proven way to fund retirement to Gen Xers and Gen Yers who may already be making regular IRA contributions,” Grove said in a news release. “Funding GFIA through an IRA contribution combines the tax benefits of an IRA with the pension-like guaranteed lifetime income of an income annuity.”
So what’s the catch to DIAs? Where’s the opportunity cost? Interest rate risk, Hawkins said. “If you are locking money up over 20 years, there’s always a risk of low interest rates.” Nor did early deferred income annuity designs offer much in the way of death benefits, although that is beginning to change, he said.
Another issue to watch out for is if and when DIAs appear within employer-sponsored 401(k) plans. Financial advisors will have to work with plan sponsors who have a fiduciary duty to participants and make sure insurance carriers will be around for a long time to honor their DIA contracts, Hawkins said.
Cyril Tuohy is a writer living in Pennsylvania. He has covered the financial services industry for more than 15 years. He has also written about food, restaurants and travel. He can be reached at Cyril.firstname.lastname@example.org.
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