Contributing Editor, InsuranceNewsNet
“Advisors and brokers will have them in their hands in about six months from now,” says David Macchia, founder and CEO of Wealth2k, Inc., Burlington, Mass. Distribution will likely be through registered investment advisors and brokered reps, he adds.
The design activity is part of the “logical evolution” going on in retirement income solution development, says Macchia, who is an active member of the Retirement Income Industry Association (RIIA). The association is a trade group that seeks to foster cross-silo and cross-industry solutions to retirement income needs.
The products will provide immediate lifetime income guarantees and have an investment component in bonds to build interest and offer liquidity, Macchia says. “As such, they will combine two silos — bonds and annuities -- into one product.”
The products will include incentives for clients in terms of costs savings, he adds. “Designs will vary but the incentives could include liquidity features, economy in terms of fees and loads, and/or better payout rates” than would be the case compared to other income solutions.
Forerunners to the combo products include the real income funds from PIMCO, Macchia says. The New York City mutual fund company is offering the PIMCO Real Income 2019 Fund and the PIMCO Real Income 2029 Fund. Both funds invest in a laddered portfolio of Treasury Inflation-Protected Securities (TIPS) and are designed to provide monthly inflation-adjusted distributions through their respective maturity dates (2019 and 2029).
Unlike income annuities, however, the PIMCO funds do not guarantee the monthly payouts. As PIMCO puts it, “although these securities are guaranteed by the U.S. government, the Fund’s distributions are not guaranteed.” The goal, says the company, “is to continually maintain purchasing power” for the defined period.
I didn’t know
InsuranceNewsNet ran the idea of bond fund/income annuity combo products by several retirement advisors. Some say they did not know that retirement product designers are traveling down this road.
Others doubt the value of the concept. “We don’t use any particular product for income planning,” explains one planner. “Our clients have different goals, risk tolerance and needs. We recommend different products to meet their unique needs. I haven’t even looked into using something like that for my clients.”
Macchia allows that planners who work with high net worth clients will likely continue to use customized approaches to meet their clients’ retirement income needs.
But he says the new products will serve the needs of another market—individuals who do not want or need, or who cannot afford, the services of financial planner. These customers will include “mass affluent individuals who need a packaged approach to address legitimate retirement income needs,” he contends.
Michael Kitces, director of research for Pinnacle Advisory Group, Columbia, Md., wonders why anyone would want a combo product like this. “What is the risk you are trying to manage?” he asks.
“I get it, when the idea is to combine equities with income annuities. In that case, the annuity helps keep the volatility of the equities from hurting the income plan. But when you are dealing with bond funds, which are a lot less volatile than stock funds, what is the risk? What would you get with a product like this?”
The overwhelming majority of people who buy bonds and bond funds do so to avoid volatility, stresses Kitces. “There are no guarantees with this, and a bond can default. But bond buyers know that if they keep the bond until the maturity date, they can get their money back.
“I am wondering, what are you solving by wrapping a bond fund and annuity together? I question whether there is any challenge or any problem that is being solved.”
Few advisors would use such products, he predicts. By way of comparison, he says “not many advisors use the balanced fund income distribution funds that have come out.” The only ones who do use those funds are advisors who encounter a low-net-worth client who cannot afford the services of an advisor, he says.
For higher-net-worth clients, the advisor’s job is to bring value to the table by customizing solutions to the client’s needs and circumstances, Kitces says. A packaged product does not fit that business model.
Do it yourself
Advisors who have a client in need of a combo can design it themselves, points out Matthew J. Schott, vice president-retirement income practice leader at Financial Research Corporation, Boston. “They can pair a bond fund with a longevity annuity,” he says. A longevity annuity is essentially an income annuity with a delayed start date for taking distribution, such as age 85.
In an advisor-structured plan, the bond fund would serve as a stabilizer in a multi-asset portfolio from which the retiree would take distributions in the early retirement years, he says. Then, as the portfolio begins to shrink in the later retirement years, the longevity annuity would kick in to provide a new stream of monthly payouts.
Would there be any advantage to developing a package that would do the same thing—that is, package a bond fund with a longevity annuity?
“I don’t know if anyone is doing that right now, but we’re researching it,” says Schott. He notes, however, that “there has not been a lot of uptake on longevity insurance (sold on its own) so far.”
Another strategy for this market is the stable value fund, he points out. They are a type of packaged approach but without an annuity. Company retirement plans such as 401(k) plans often offer these products.
Stable value products invest their funds in a “high-quality diversified fixed income portfolio,” according to the Stable Value Investment Association website (http://stablevalue.org). The portfolio includes bonds and uses bank and insurance company contracts (wraps) to protect against interest rate volatility. The funds do not, however, guarantee a specific monthly income stream.
The challenge with packaged income products is to deal with the many tradeoffs, the FRC expert says.
For instance, for period certain annuities, the payout will be greater than lifetime annuities but the payout period is limited. For lifetime income annuities, the payments will last for life but they will be smaller (than for period certain annuities). For joint and survivor annuities, the payments will be guaranteed for life but at a smaller payout than for individual annuities. Inflation protection is often available, but at a significant cost.
On the bond fund side, there are questions about asset management and drawdown approaches.
If advisors decide to structure bond fund/longevity annuity combos on their own, they must factor in the trade-off of taking some of the money from the bond fund to deposit into the annuity.
Also, both client and advisor need to deal with the complexities such approaches may involve, Schott says. “It can work if it’s sold with a holistic understanding of the client and the client’s need. But is the product’s one-size-fits-all approach suitable to the need? Can it be integrated with the other investments? Will there be asset allocation guidelines?”
Questions aside, Schott predicts that asset managers and insurance companies will try to pair their products together in some fashion for the market that needs packaged solutions.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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