Displaying items by tag: fixed annuities
Data from 2020 is in and it is clear: annuities are increasingly popular among advisors, and we mean that in the strictest sense of “advisors”. Annuities sales have not just grown with broker-dealers, but also with RIAs. For many years RIAs shunned annuities, but recently two major changes have made RIAs warm to them. Firstly, annuities compensation has become more aligned with RIA pay models, and secondly, with so many clients retiring in a period of high volatility, there is a greater need than ever before. According to David Lau, CEO of DPL Financial, “RIAs historically have used mostly investment-only variable annuities with the occasional single-premium immediate annuity mixed in, and that is because annuities until recently haven’t been built to fit into their business model. He continued “One of the things that’s misunderstood about annuities is that in a low-interest-rate environment, it’s something you may not want to consider … In today’s market with interest rates where they are, it is about 41% more expensive to fund retirement income using a bond portfolio than it is using an annuity.”
FINSUM: That last quote about the affordability of annuities is a really key point. Annuities can play an important role in a portfolio more cheaply than most instruments right now, and do so with less risk.
Annuities have had a good 12 months and it is starting to seem like they are entering a golden age. Not only are the country’s demographics trending in favor of annuities, but the last year’s volatility and the recent rule change allowing annuities into 401(k)s are big tailwinds. Another big trend which helps is that since more and more companies are opting to offer 401(k) programs instead of DB plans, then people are ever more in need of guaranteed income. According to AIG, “It’s less about the vehicle. More plan sponsors and participants need to get comfortable with the creation of income … The only way to get guaranteed income is to annuitize retirement benefits. The question then is will annuities be offered in-plan or out-of-plan”.
FINSUM: The market and regulatory context are becoming better and better for utilizing annuities for clients. It might be time to think about these options if you aren’t already.
401(k)s and annuities are two of the most prominent retirement savings products in the US. However, clients often have a hard time distinguishing one’s advantages versus the other (and disadvantages). In reality, they are quite different products. The only cross-over between them (for now) is that they are both geared towards retirement, and that one can cash out a 401(k) and use it to buy an annuity. The big advantage of 401(k)s is that there are no sales incentives/commissions for a client to take part in an employer’s plan, as well as the fact that they can benefit from employer’s matching their contributions, something that cannot happen in annuities. Annuities, however, have the big advantage of guaranteed income, and because of the ability to choose which annuity one buys, there is more freedom in investment selection. Both have similar terms for early withdrawals.
FINSUM: These products are also great in concert with one another. For example, using part of a 401(k) cash-out to buy a deferred annuity, allowing upside in the 401(k) and guaranteed income in the annuity. Soon enough annuities will be allowed in 401(k)s.
Annuities have seen major growth in popularity since the pandemic began—a 40% tumble in stock prices when a huge portion of Americans are about to retire will do that. Annuities sales have risen, and advisors—especially those new to selling them—may be asking themselves if the products are good fit for all clients. The answer is a resounding “maybe”. The reality is that almost all portfolios can benefit from a portion being put in a product with guaranteed lifetime income. However, the degree of exposure depends hugely on the client’s wealth, spending habits, self-control (as it relates to withdrawing from investment accounts), and even personality. According to the head of a leading firm in the annuities space, “I think that, in general, an annuity makes sense for most people. The only true way to guarantee lifetime income is through an annuity contract with an insurance company”.
FINSUM: For the wealthy and those with great self-control an annuity is an excellent hedge against big losses. For the rest, it can be a critical component that preserves lifetime income.
Are annuities a good deal? This is a seemingly simple question with an incredible range of answers. The reality is that the answer depends on who you ask. If your main consideration is stable income in retirement with little risk to principal, then the answer is a resounding yes. If you are looking for great upside great and are not concerned with losses of principal, then the answer is no. And therein lays the most important part of annuities—they need to fit client goals. Studies show that despite the lack of “fit” for some clients, annuities do add value to almost all portfolios, even if clients are often reluctant to buy them.
FINSUM: Annuities are about to be allowed into 401(k)s, which is a big growth opportunity for the space. Insurers are going to have to keep honing their positioning and messaging to appeal to retail buyers directly.