The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
By Linda Koco
Thirteen annuity companies currently offer a total of 15 deferred income annuities (DIAs). At least eight more DIAs will debut this year, making for a total of 23 DIAs available for sale by year-end.
That’s according to Curtis V. Cloke, who has been following the products closely for 15 years in his capacity as founder and chief executive officer of Thrive Income Distribution System in Burlington, Iowa.
He is glad to see the growth, since the income distribution system developed by his firm uses DIAs as part of its method for helping advisors create a retirement income floor for clients. But he thinks the products could pick up more steam if industry experts knew more about how flexible the products are.
Essentially, DIAs are like single premium immediate annuities (SPIAs), in that both are fixed annuities that guarantee a retirement income. The income start date on SPIAs is typically any time before the first 13 months of policy ownership; the start date for DIAs is after the first 13 months.
The problem is, too many annuity professionals believe that DIAs are life-contingent-only products, Cloke told AnnuityNews. The less informed include not only advisors but also academics, consultants and people at insurance carriers, he said.
“They think the DIA is only for situations where the client wants to start income payments deep into old age, say at age 80 or 85,” and that the payments will continue until death of the insured.
That limited view is not accurate, Cloke said. Some DIAs are very flexible, and allow the income start date to begin any time after the first 13 months and on to several years after purchase. These flexible DIAs can be written as period-certain income annuities, just like SPIAs, he said. And they can be written on a single-life or joint life basis, with installment refund or cash refund options and with cost of living (COLA) options too.
Many DIAs also allow buyers to make multiple contributions into the contract rather than just a single-premium contribution, according to a report last year from LIMRA Secure Retirement Institute (LIMRA SRI). Owners are often allowed to change the income start date too, and liquidity features are not uncommon.
Some DIAs do limit the income start date to the very old ages, Cloke allowed. They are called longevity annuities or deeply deferred annuities among other names, but they are just one type of DIA, he emphasized.
In terms of product development, the original DIAs were flexible products, not the longevity version, he said. For instance, the very first DIA was a flexible policy introduced by Prudential in 1999. But the market gave the early products scant attention, so the flexible DIAs languished for a few years. But in the mid-2000s, a few carriers came out with longevity DIAs and the novelty of their long deferral period caught industry attention. Sales began to stir and then carriers started innovating with flexible DIAs, with the result that a number of flexible designs exist today.
From 2010 on, he said, “DIAs have become the fastest-growing development in manufactured fixed insurance products that I have ever seen.”
The early DIA history helps explain today’s misunderstandings about DIAs, Cloke suggested. People may hear the word DIA, but recall only the life-contingent longevity products of the mid-2000s. But today’s products have so much flexibility and variety that industry professionals need to know they won’t be stuck with only one approach, he said.
Cloke added that he is trying to get the word out because, as the products proliferate, consumers will start hearing more about DIAs. Some will turn to advisors to learn more. If an advisor only has a limited view of the products, the advisor “could miss seeing possibilities for their clients.”
“These possibilities have to do with creating the type of retirement income floor that’s the best of what could be for the client.” That is a key aspect of optimizing the portfolio, he said.
Cloke describes himself as “product agnostic” where income solutions are concerned. But he said he is focusing on DIAs right now, so that industry professionals will know how to use DIAs in a “product glidepath” for the distribution phase of a client’s life, right along with SPIAS and other income approaches.
“We’re swimming uphill on this right now,” he admitted, but he is persisting.
DIA sales heating up
His efforts are probably coming at a good time. Total DIA sales are moving ahead at a fast clip. In first quarter alone, the current players produced $620 million in DIA sales, up 57 percent from first quarter 2013, according to LIMRA SRI’s most recent annuity report.
The first quarter results also were down 13 percent from the previous quarter, the report said. But the researchers noted that this was the first quarter-over-quarter decline for DIAs since LIMRA SRI began tracking the products. In view of the new players in the market, the researchers said they are expecting continued “strong growth” in DIA sales over the next several quarters.
DIAs are being sold in the defined contribution retirement plan market as well as the retail annuity market. In the retirement plan market, the DIA and the guaranteed lifetime withdrawal benefit (GLWB) are the two types of in-plan guarantees the plans offer, according to a report last year from LIMRA.
The study noted that 1.8 million plan participants had access to in-plan guarantees in their defined contribution plans.
The report did not indicate how many participants have elected the DIA option (or the GLWB option, for that matter), but it’s probably a good bet that not all of them did. Even so, the fact that the feature is available to nearly 2 million participants indicates that exposure to the DIA concept is substantial. As more plans add in-plan guarantees, this exposure likely will spread.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at email@example.com.
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