Solving the retirement planning puzzle — With Todd Taylor

Todd Taylor, as head of New York Life’s retail annuities business, has helped shape the business for an industry leader that had more than $22 billion in sales in 2022. He believes being a mutual company has given New York Life an advantage over competitors in riding the recent annuity juggernaut.

He has spent about half his 15-year tenure at New York Life working in the annuity business, first in an analytics and strategy role and then eventually leading the business, which he took over two years ago. An actuary by training, he said he “grew up in the company.”

Always interested in personal finance, Taylor said he “fell in love with the intricacies of retirement planning. It’s one of the most challenging financial planning puzzles.”

In this interview with Publisher Paul Feldman, Taylor describes how annuities can answer the question of “How do we help Americans solve this really challenging personal finance problem?”

Paul Feldman: The annuity market has been booming. What are you seeing from your vantage point as the head of New York Life’s annuity business?

Todd Taylor: The past 18 months have been pretty wild in the annuity business. The combination of market volatility, rising interest rates and — probably most materially — the pullback in bond fund returns reminded people that the 60/40 portfolio wasn’t foolproof. It sent a wave of money moving into basically anything guaranteed — that includes fixed annuities or multiyear guaranteed annuities but also indexed annuities, basically anything that gives you a rate of return with some kind of guarantee.

And so, the industry is up. We hit $300 billion as an industry; we’ve been trending at $200 billion a year for most of the past 20 years. So, there’s definitely some increased excitement in the space. And I think people are coming back to the understanding that annuities add a lot of value in this environment. I’ll argue they actually add a lot of value in nearly any environment.

Some of the value that an annuity provides over alternative assets, both in terms of the quantifiable value but also some of the behavioral benefits of annuities, is evergreen. I’m glad there’s a lot of interest in annuities, but still, depending on how you count it, there are $50 trillion to $80 trillion of personal financial assets out there, and we’re a $200 billion- or $300 billion-a-year market.

There’s a lot of green space for annuities to be adopted by more advisors, by more consumers. So last year certainly helped. But I hope this momentum will continue to build and we’ll be able to attract more customers to use the products.

Feldman: What is needed to attract more people to annuities?

Taylor: I think a couple of things are needed. First, I think that as an industry, we’ve become somewhat tripped up on how we fundamentally explain the values of annuities or even other insurance products. The reason these products are valuable in a portfolio is they’re able to take risks off the table or materially reduce risks that are very expensive to insure using traditional assets. A great example of this is if you want to build a stream of income throughout retirement.

If you do that with a bond ladder, you have no idea when you’re going to die and how long you’re going to need that income. So you must be very conservative with that bond ladder to do that.

If you take that bond ladder and replace it with a single premium immediate annuity or any other guaranteed lifetime annuity, you can generate more income because you’ve offloaded that risk — that risk that you can’t hedge by yourself — to the insurance company. That really is a form of insurance.

Second, the presence of that insurance not only helps the portfolio in unique ways, but it also actually changes the way people behave.

An example of this is the ability to buy and hold in a portfolio. I have a degree in economics, and I know that the optimal amount of time to trade in your 401(k) is probably never. But I still respond to the market and do things like trade in stocks and bonds, even though I know it’s suboptimal. That’s how most people are. We respond to what we see in the news.

A lot of research shows annuities not only provide real, quantifiable benefits but also help people make better decisions. The intrinsic value of the products, as well as what they can do in a portfolio, are things that we as an industry must continue to get more advisors to understand — and eventually reach consumers as well — so that this doesn’t become a one-year blip of $300 billion.

Feldman: The market has been crazy, and yet New York Life seems to stay on the top of the annuity sales charts. What is your secret to maintaining your leadership position in this industry?

Taylor: One of the reasons we’ve been at the top of the annuity industry for the past decade and longer ties back to our structure. We’re a mutual insurance company. Our goal is to be here for the long run. We’re owned by our policyholders. We don’t have shareholders, so our view is long term. We want to pay guarantees. It’s tied to our mission. We want to be there for the future, and that’s how we approach the business.

We sell a consistent set of products, and we consistently distribute it, and we consistently service it year after year after year. We may not always have the flashiest rate or every single new feature, but we’re going to be in the market year after year after year.

Our distributors have responded to that. They know New York Life’s going to be there through the ups and downs. That has been why we’ve been consistently at the top.

Feldman: How do you see the macroeconomic environment affecting annuity sales in the future?

Taylor: I do my best not to try to predict any macroeconomic moves into the future, but I will say the biggest driver now is uncertainty. There’s a lot of macroeconomic uncertainty, and there are more Americans than ever before who are right before or right after the typical retirement age. With fewer people having pensions, all this uncertainty means they must figure out how to take their nest egg and convert it into income. The uncertainty highlights the value of the guarantees that we can offer as an industry.

Feldman: How do you see the potential fiduciary rulemaking impacting annuities in retirement?

Taylor: It’s a complex question. I think there has been a lot of regulation around fiduciary standards, and obviously some of this is still in flux. We’ve adjusted to this, and I think this has codified much of what our agents were already doing in the market. We feel strongly the value of proprietary distribution on offering a wide set of solutions and making sure consumers have all the information they need in terms of the availability of product and the decision-making process. So, regardless of which way the regulation goes, we feel confident that we are more than compliant with where that stands.

On the other hand, we also distribute through external distributors and the annuity industry. It’s well documented that in the wake of the 2016 Department of Labor rule, there was a lot of what I would call “consternation” in the industry that in some ways stalled some of the momentum around annuities.

I don’t think that means that annuities are incompatible with a fiduciary standard. In fact, I think the opposite. I think there are many advisors out there who aren’t considering annuities in a retirement plan, and whether they choose to include them in a plan or not, I think they should consider them. I think the fiduciary standards in general will benefit annuities, but there is a lot of regulatory-driven noise, which I think causes many distributors to focus on how they comply with it and in some ways stalls out success on having planning conversations.

I think that our products have demonstrated value that should fit into a planning conversation, regardless of the agent’s or advisor’s registration status.

Feldman: There’s a lot happening right now around SECURE 2.0 — that it’s already boosting annuities, that it will continue to boost annuities, and there’s even talk about the SECURE Act 3.0. What are your thoughts on the SECURE Act?

Taylor: Both the SECURE Act and SECURE 2.0 were great examples of bipartisan legislation that moved a number of retirement goals forward in terms of access and being able to expand the amount of money people can save for retirement. Many of these things were aimed largely at the folks who don’t have access to a large company 401(k) plan. While I think that there’s room to grow in the future, there’s a lot of benefit that can be generated from what has been already produced.

As one example of this, there were changes in SECURE 2.0 to the rules around qualified longevity annuity contracts, so that if people put money into a QLAC, they can essentially defer all their required minimum distributions. Basically, their RMDs can be passed on to the future.

This provides great value to the consumer. They’ve got a longevity hedge, it makes their planning much easier. It also it gives them sort of a tax benefit. I think SECURE 2.0 just basically changed some of the rules that simplified how that was done, but it’s a great example of aligning tax incentives with something that nearly every academic says is beneficial to the consumer. I’m thrilled with much of the work that was done in SECURE 2.0.

Feldman: A lot of people are talking about index products these days. How do these fit into New York Life’s annuity picture?

Taylor: We offer an index option within a variable annuity. So it’s not technically an index annuity. It’s basically a variable annuity in which you have sort of subaccount sleeves, like a traditional variable annuity and then an index sleeve. We launched this product, called IndexFlex, about a year and a half ago. It’s one of the most successful product launches in our history, and there are a couple differentiators in there.

The first is, on the index slide side, we guarantee the cap rate for the duration of the surrender charge. So if you buy a seven-year product, your cap rate is guaranteed. It’s not going to go up, it’s not going to go down. Again, that has a lot to do with our mutual structure, our view that we don’t want to put ourselves in a place where we have to game those rates.

We think it’s a simple story to tell a consumer: This is the rate you’re going to get. And because it’s in a VA, you can move the money. There are restrictions on this, but you can move the money back and forth. It enables you to create this hybrid design that effectively lets you dial your risk exposure up and down. If you want to take more risk on the equity side, you put more money in the subaccounts.

The index product is fundamentally a bond replacement. If you want more money on the bond side, you have something to protect you in a down market or protect you and provide that cap and floor profile. We’ve had a lot of success positioning this as a traditional index annuity while but competing in the registered index linked annuity space with this kind of hybrid design that enables you to dial your risk up and down.

Feldman: Is New York Life considering offering a RILA?

Taylor: Not in the immediate term. We view this product, IndexFlex, as our RILA, and we can demonstrate that the risk return profile from putting half your money in the index sleeve and half your money in the subaccounts compares favorably to a RILA. With RILAs, you have a band with large losses and large gains where you either give up the upside or you’re exposed to the downside. Our view is with a 50/50 allocation between indexed and subaccounts, you will do better than with a RILA in a really bad market or in a really strong market. On average, it sort of works out to the same return, but we think the consumer is better off with that protection on the downside and exposure to the upside.

Feldman: How do people better incorporate annuities in retirement planning strategies?

Taylor: A lot of research on the way that we’ve done financial planning in the past is based on assumptions of human behavior that aren’t correct. So we developed something called the Efficient Income Frontier, and I’ll use that as an example. EIF is predicated on this idea that you know what people’s spend rate is going to be in retirement. So, if you say you’ve got a 4% withdrawal rate, in line with the 4% rule, I can give you a pretty good idea — based on your age and your gender and your life expectancy outlook and your expectation of the market, what an optimal mix of stocks, bonds and annuities is for you. It’s simply a math problem.

A couple years ago, our public relations team asked people, “What’s a safe withdrawal rate in retirement?” Our hope was that they were going to say all kinds of crazy numbers. Not 4%, but 12% or 15% and whatever else. And they did say all kinds of crazy numbers. But then we also asked the retirees, “What are you actually spending?” And the answer was mostly “We’re not withdrawing.” So, I don’t know what the safe withdrawal rate is, but it doesn’t matter because I’m actually living off of interest and dividends. Now, financial planning says that’s nonsense, you’re supposed to accumulate assets for you to spend down in retirement.

But what this highlighted is that many retirees, because of all the uncertainty — the market’s all over the place, interest rates are all over the place, we don’t know how long we’re going to live, we’re worried about the cost of long-term care, we’re worried about our roof falling in — people learn to systematically sort of self-insure their retirements and hold onto those assets. They basically just spend interest or dividends or the money that comes out of their pension or whatever else. And what that tells me is that we need to adjust our approach for retirement planning to meet that reality. It’s irrelevant to talk about what’s the optimal strategy for a 4% withdrawal rate if someone’s spending at 1%, and I think that’s where we’ve leaned in on some of the positioning of our annuities.

You can show that systematic underspending I described. So, if someone’s going to spend 1% a year — just their interest and dividends — what that means is they’re likely to have this large bequest left over for their heirs. The problem with that is most people say they don’t want to do that; they want to enjoy their retirements. They want to spend more, but they don’t know how to. The data shows that if you control for other factors, the presence of an annuity helps people spend more in retirement, which is a great behavioral benefit. It’s helping people enjoy their retirement savings, and that’s a behavioral benefit of an annuity that we haven’t historically focused on.

Feldman: New York Life is one of the few companies selling long-term care insurance. How do you view LTCi alongside annuities?

Taylor: I think the two products complement each other. We’ve been in the long-term care market for a long time. We believe in the value proposition. There are health care expenses in retirement. The cost of health care has become relatively predictable. What’s not predictable is that shock event when you end up having to go to a nursing home or you need home health care.

That’s a great example of a situation when insurance is valuable. Long-term care is not free, there’s a cost to the product, but it does provide this material benefit for people who need access to those services later in life. The Employee Benefit Research Institute did a study a couple years ago, and they found that those who owned long-term care insurance versus those who didn’t spent something like 30% or 40% more in retirement.

They didn’t have any more money; they just chose to spend it because they knew they had this backstop of the long-term care policy, and that’s a real benefit. You can successfully enjoy your retirement. In my mind, it’s similar to an annuity. An annuity is fundamentally hedging against longevity. This is hedging against later-in-life health care expenses.

Feldman: You talk to a lot of advisors. What advice do you have for them?

Taylor: Bill Sharpe, the Nobel laureate, said something to the effect that “retirement planning is the most complicated problem in finance.” I think that’s true, and I think that’s hard for folks to handle on their own. It’s important for people to engage with advisors and get advice from a human being.

What I often tell agents and advisors is that we must think about incorporating investments and insurance solutions together. They work together quite well. An annuity is not the answer to every financial planning need, and not everyone needs an annuity. But I strongly believe that every financial advisor in this country who works with pre-retirees and retirees should be able to offer annuities in their product set and be able to discuss the pros and the cons of annuities. And it’s not as a one-off. It’s part of an overall solution.

I think there are too many professionals who operate largely in the insurance lane and too many who operate only in the investment lane. To offer true, holistic advice and guidance, you must operate in both. From my perspective, that’s what the best advisors do and that’s how they make the biggest positive impact for their clients.