By Cyril Tuohy
Decades from now, financial industry watchers may point to 2014 as a seminal period in the history of annuities, given the progress that has been made in recent months to get annuities included in employer-sponsored retirement plans.
In July, the U.S. Treasury Department issued its final rules regarding longevity annuities, and in early October the Internal Revenue Service cleared the way for plan sponsors to include deferred income annuities in target-date funds.
The importance of these recent victories was not lost on annuity industry proponents who have worked to educate lawmakers and consumers about the value of securing “guaranteed” income in a world where income security can no longer be taken for granted.
“We’re always thrilled that the Treasury has realized the value of fixed annuities,” Kim O’Brien, president and chief executive officer of the National Association of Fixed Annuities (NAFA), said in an interview with InsuranceNewsNet.
“Anytime annuities are recognized by the government or any other major entity, we love it," O'Brien said. "This is a big boost to annuities.”
Annuities have been around for many years. Defined benefit pension plans and insurers have used them for decades to guarantee income for corporate retirement plan liabilities. The industry sells billions of dollars' worth of annuities every year.
This year's second-quarter fixed annuity sales reached $24.3 billion, an increase of 41.6 percent from the year-ago period and a jump of 7.6 percent from the first quarter, according to data supplied by Beacon Research.
Calling 2014 a seminal period might be skirting hyperbole, but here’s the point: Generally, annuities don’t have the same exposure early on in the lives of retail consumers, and that’s certainly true within the defined-contribution, employer-sponsored plan.
You want proof? When’s the last time “annuity” or “fixed annuity” appeared on a 401(k) or 403(b) statement other than in the fine print?
From the very first statement, investor assets grow in a balanced fund, an income fund, a lifestyle fund or a target-date retirement fund.
It's no surprise, then, that with the mutual fund industry wielding the upper hand in the eternal conflict between investing in assets and protecting them, retail investors with 401(k)s and 403(b)s don’t connect fixed annuity products with income or long-term protection.
Remember, we’re not talking about middle managers with master’s degrees or academics who hold advanced degrees.
We’re talking about Joe working the third shift at Ford Motor Co., producing the F-150 pickup truck. We’re talking about José who runs a temporary employment agency that supplies day laborers to farms in California’s Central Valley. We’re talking about Josephine, who graduated from college in the spring with a nursing degree and who has just completed her three-month evaluation period at a pediatric clinic in Tampa, Fla.
All three are W-2 employees. They have families, schedules, bills to pay and debt to pay off. They all have aging family members to care for. And the odds are that all of them will one day crave guaranteed income.
With a toehold inside the employer-sponsored retirement plan environment, fixed annuities are on their way to establishing a bigger beachhead, even if not all plans offer fixed annuities, and even if not all participants elect to invest in them.
O’Brien, who in a blog post at the beginning of the year proclaimed 2014 the “year of the fixed annuity,” said the next step for NAFA is to encourage regulators to allow fixed index annuities within employer-sponsored plans.
These fixed products, which lately have benefited from explosive growth due to low interest rates, can only further the value of annuities to 401(k) investors.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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