Hybrid vehicles: mutual funds are now competing with annuity writers to provide competitive retirement income.[ILLUSTRATION OMITTED] Last October, Fidelity Investments Fidelity Investments is a group of privately held companies in the financial services industry. It is made up by two independent but closely cooperating companies, Fidelity Management and Research Corporation (FMR Co. announced the creation of the first mutual fund product to combine an asset allocation Asset Allocation The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. strategy with a proprietary withdrawal program, designed to provide regular withdrawals over a defined period of time. If that sounds like a mutual fund product that works like a variable annuity Variable Annuity An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. , it might be because the mutual fund industry is a little worried. For decades, mutual funds were the place to be for average American investors trying to accumulate assets for retirement. But now that so many people are approaching retirement, the new focus is on creating retirement income. And annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. writers believe they have more to offer in that line. Which industry has the inside track on retirement income? There are no sure answers. As of this past December, mutual funds held about $12 trillion in assets, up 15.6'% from a year earlier, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Investment Company Institute. By comparison, in the 12 months ending Sept. 30, 2007, variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. held about $1.5 trillion in assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. , up 15.3% from a year earlier, according to NAVA NAVA National Association for the Visual Arts NAVA National Association for Variable Annuities NAVA Navajo National Monument (US National Park Service) NAVA North American Vexillological Association , the Association for Insured Retirement Solutions. When that's added to the estimated $500 billion under management in fixed and indexed annuities, the mutual fund industry has about six times the assets of the annuity industry. Who has the better position depends on current market conditions, said Wayne Locke, managing director of New York-based SMART Business Advisory and Consulting The creator of this article, or someone who has substantially contributed to it, may have a conflict of interest regarding its subject matter. It may require cleanup to comply with Wikipedia's content policies, particularly neutral point of view. , a 700-employee consulting and accounting firm with about 30 to 40 insurance clients. "Now people are spooked by what's going on What's Going On is a record by American soul singer Marvin Gaye. Released on May 21, 1971 (see 1971 in music), What's Going On reflected the beginning of a new trend in soul music. with the stock market," he said. "In times like this, you see a little leakage LEAKAGE. The waste which has taken place in liquids, by their escaping out of the casks or vessels in which they were kept. By the act of March 2, 1799, s. 59, 1 Story's L. U. S, 625, it is provided that there be an allowance of two per cent for leakage, on the quantity which shall appear out of the mutual funds industry." He added that only some of the money seeking safe havens Safe Havens is a comic strip drawn by cartoonist Bill Holbrook and syndicated by King Features Syndicate. Started in 1988, the strip is currently published in more than 50 newspapers. goes into fixed annuities Fixed annuities Contracts in which an insurance company or issuing financial institution pays a fixed dollar amount of money per period. . "I don't think annuities have such a huge edge that people are saying, 'Wow, there's this incredible alternative' that you're going to see a rampant run from mutual funds into annuities," he said. But beyond current market conditions, a real battle is under way over who will be the provider of choice in retirement income. At stake are huge sums. American households have about $10 trillion in assets accumulated in retirement plans alone. As they deploy these assets, many plan participants Plan participants Employees or other beneficiaries who are eligible to receive benefits from a company's employee benefit plan. may choose guarantees, which could mean transfers from mutual funds into annuities. The hybrid retirement income offering by Fidelity--and other fund companies expected to launch similar products-makes a great deal of sense lot investors seeking to generate income and willing to take on some risk, said Mark Halverson, executive director of global wealth and asset management for Accenture. "They may view that some of these mutual fund complexes that offer this capability have high trust value and brand image," he said. "They may feel comfortable working with these firms as they generate the income." The more risk-averse will still be looking for Looking for In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. guarantees, he said. Mutual Advantages The advantages to Fidelity's Income Replacement Funds, which the company describes as a single product making use of 11 horizon-date funds in two-year increments from 2016 to 2036, are its low costs and flexibility. As the investor ages, the asset allocation becomes more conservative, emphasizing fixed-income and short-term funds. Annual costs of the 11 hinds Hinds may refer to: People with the surname Hinds:
[ILLUSTRATION OMITTED] Investors can add money at any time, take additional withdrawals, turn their monthly payments on or off, exchange into a fund with shorter or longer horizon dates or sell the product, all without penalty. "If I'm a lifelong Fidelity customer, this is something I might like," said Locke. The monthly payments, however, will vary based on underlying performance, and there are no assurances the strategy will last the period chosen by the buyer, which can be up to 30 years. So, at the same time Fidelity launched its mutual fund product, it also introduced a variable annuity offering guaranteed lifetime income, but costing about 40% less than the industry's average comparable annuity. Marketed as the Growth and Guaranteed Income Annuity, it's offered through Fidelity's subsidiary, Fidelity Investments Life Insurance Co. Ken Hevert, vice president of annuity product management, said Fidelity expects this new offering will attract more than just long-time Fidelity customers. Like the new mutual fund offering, Fidelity's new annuity is meant to challenge prevailing variable annuity designs by offering guaranteed lifetime income without having to annuitize Annuitize To commence a series of payments from the capital that has accumulated in an annuity. The payments may be a fixed amount, for a fixed period of time, or for a lifetime. annuitize To convert a sum of money into a series of payments. . It is cheaper, simpler and more transparent than others. The product offers only two investment options, both of which put 60% in stocks and 40% in fixed income. Like other VAs with guaranteed lifetime withdrawal benefits, Fidelity's benefit floor is 5% of the purchase price. If the contract value is greater at any anniversary date, the withdrawal benefit ratchets up to 5% of the new value and is guaranteed never to decline. In effect, the investments need to rise nearly 7% over a year to increase the contract value for an individual taking withdrawals; more for a couple. The surrender fee Surrender Fee A charge levied against an investor for the early withdrawal of funds from an insurance or annuity contract, or for the cancellation of the agreement. Surrender fees act as an economic incentive for investors to maintain their contract, and they allow the insurance is 2% during the first five years. No guaranteed minimum death benefit is offered. Greg Salsbury, executive vice president for Jackson National Life Jackson National Life Insurance is a U.S. life assurance company that is a subsidiary of the UK based insurer, Prudential Plc. Founded in 1961, Jackson is headquartered in Lansing, Michigan, and has over a thousand employees in the region. Distributors, the distribution arm of Jackson National Life Insurance Co., said Fidelity's mutual fund retirement income product is similar to a single-premium immediate annuity immediate annuity An annuity that is purchased with a lump sum and that begins making payments one period after the purchase. Immediate annuities are most commonly purchased by people who have accumulated a sum of money and are ready for retirement. , except that it can't provide income for life. "The mutual fund companies will say they hope to provide significantly greater upside Upside The potential dollar amount by which the market or a stock could rise. Notes: This is basically an educated guess on how high a stock could go in the near future. See also: Bull, Downside , and they might," said Salsbury. "But you're taking more risk from a retirement planning Retirement financial planning refers to a collection of systems, methods, and processes which, in their aggregate, support a family unit's (client's) desire to achieve a state of financial independence, such that the need to be gainfully employed is optional. standpoint because those products don't offer income for life." Fidelity's new retirement-income variable annuity comes up short, Salsbury said, because it offers only two investment options as opposed to the industry standard of a multitude of investments across many sectors. "Without the right subaccounts and models available, you have a gutless living benefit," he said. "If you think about it, without performance, all you have is a fixed annuity Fixed Annuity An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal. . Then all I'm really selling you is the minimum. So we often will say that you sell a living benefit with the hope that it never comes into play." To focus on the living benefit "is like focusing on the lifeboat as opposed to the ocean liner ocean liner Large merchant ship that visits designated ports on a regular schedule, carrying whatever cargo and passengers are available on the date of sailing. The first liners were operated in the North Atlantic, notably by Samuel Cunard of Britain, beginning in 1840. ," he said. Jackson National believes variable annuities are complex products that are best sold by advisers who can help clients pick appropriate features and avoid unwanted ones, according to Salsbury. His figurative fig·u·ra·tive adj. 1. a. Based on or making use of figures of speech; metaphorical: figurative language. b. Containing many figures of speech; ornate. 2. lifeboat, however, is a big part of annuities' value proposition. Pierre Louis Seguin, managing director of North American North American named after North America. North American blastomycosis see North American blastomycosis. North American cattle tick see boophilusannulatus. life insurance at Accenture, said annuity writers have an advantage because the middle-class market can't take a lot of risk. Accenture's Halverson believes the greatest risk profile is borne by people entering retirement who have accumulated wealth to address risk, rather than insured against it. "If their portfolio is diminished significantly in a market downturn during their first several years of retirement, that could have dramatic implications for the long-term outlook of their retirements," Halverson said. "So what we sense is with that pressure, there is a bit of a psychology toward more of that guaranteed model." Transition Phase Fidelity's Hevert acknowledged that his company took a risk in deciding to offer only two managed portfolios, but decided to take portfolio management "out of the hands of consumers because they don't want to mess it up" and put it into the hands of Fidelity's experts. "We gave those experts access to an extremely broad set of investment options," he said. "They're going to maximize those through what we think is a very effective, quantitative investment methodology that includes some alternative asset classes." Annuity portfolio managers have access to all of the Fidelity equity retail funds, so their underlying fund universe actually exceeds 130, said Hevert. They're usually holding up to 20 different funds at any given time, including alternative asset classes--historically a driver of performance, he said. The new products are sold to consumers directly through Fidelity's network of face-to-face offices, phone-based financial consultants and its Web site. They are also sold through about 700 fee-based investment Fee-Based Investment An investment account in which the advisor's compensation is based on a set percentage of the client's assets instead of on commissions. Contrast this to commission-based investment, in which the advisor makes money based on the amount of trades made or the advisers. Hevert declined to provide sales figures sales figures npl → cifras fpl de ventas , but said demand for the annuity product is exceeding expectations by nearly 50%. He said Fidelity developed its new retirement-income products specifically to help customers in the transitional phase between wealth accumulation and retirement drawdowns, including how to handle asset allocation, longevity longevity (lŏnjĕv`ĭtē), term denoting the length or duration of the life of an animal or plant, often used to indicate an unusually long life. , inflation and market volatility. Fighting for the Middle It is there, among the middle-income and mass-affluent demographic groups, that the battle of the Financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. providers is being waged. "If you look at the upper wealth tiers, there's a private banking model and a broker-dealer advisory model that are pretty well-established," said Halverson. "At that level, what you're selling is trusted financial advice." But it's different with the mass markets, Halverson said. There is a need for advice, whether from representatives at banks, insurers or mutual fund companies, particularly because defined-contribution plans Defined-Contribution Plan A retirement plan wherein a certain amount or percentage of money is set aside each year for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties. hold so much of their assets and there are so few pension plans for these workers. To create guaranteed income streams, Halverson said, advisers in the banking channel create certificate-of-deposit ladders, and brokerdealers create bond ladders Bond Ladder A strategy for managing fixed-income investments by which the investor builds a ladder by dividing his or her investment dollars evenly among bonds or CDs that mature at regular intervals simultaneously (for example, every six months, once a year or every two years). . So it is prudent for mutual fund companies to offer income programs, too. Companies that run defined-contribution plans have access to individual plan participants, giving them "a leg up," said Halverson. And the Pension Protection Act of 2006 allows firms to offer advice to participants, which gives them a way to build on existing relationships. [ILLUSTRATION OMITTED] "Those who have to catch the assets as they roll out of those plans have a little more of a challenge in front of them," he said. Though much of the battle has been about product design and core competence Core competence Primary area of expertise. Narrowly defined fields or tasks at which a company or business excels. Primary areas of specialty. , distribution is also a key element. "This one is in favor of banks and financial institutions other than life insurers," said Seguin. The key component for insurers is to transform its very basic and traditional sales force into one "with relevant skills and good credibility," he said. Seguin also said insurers that leverage the bank distribution channel are on a path to success because it is where so many middle-income customers do business. Common Ground Despite the marketing struggles, financial-services companies have a history of collaborating on product development. Insurers, of course, have offered mutual funds inside their variable annuities for many years, but mutual funds can't be marketed with insurance-style guarantees. "So it's a one-way street Noun 1. one-way street - unilateral interaction; "cooperation cannot be a one-way street" unilateralism - the doctrine that nations should conduct their foreign affairs individualistically without the advice or involvement of other nations 2. ," said Locke, the consultant. "The advantage right now is to the annuity provider." But according to Halverson and Seguin, mutual fund companies are working to bring an annuity wrapper A data structure or software that contains ("wraps around") other data or software, so that the contained elements can exist in the newer system. The term is often used with component software, where a wrapper is placed around a legacy routine to make it behave like an object. to some of their mutual funds. No such products have yet appeared, but Accenture is working with companies to explore that option, Halverson said. Salsbury said he expects more cooperation between mutual fund companies and annuity writers. "The potential for providing the benefits of a living-benefit wrapper on a mutual fund-like carriage is very intriguing in·trigue n. 1. a. A secret or underhand scheme; a plot. b. The practice of or involvement in such schemes. 2. A clandestine love affair. v. , and a number of companies, including ours, are pursuing those possibilities aggressively," he said. Such a product may not be possible until regulators agree on who will oversee them, said Locke. If banking regulators assert that right, they could face a credibility problem, Locke said, because someone is going to ask them where they were while collateralized debt obligations Collateralized Debt Obligation (CDO) A general inclusive term which covers Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations, , including subprime mortgages, were being created and sold. Insurers, meanwhile, are working to develop hybrid products that combine wealth and health, such as an annuity with a long-term-care rider and some level of death benefit. Seguin said such products will appear over the next two years. * The Trend: A mutual fund company has taken on annuity writers with a product that offers reliable retirement income. * Behind the Trend: Mutual funds are reacting to the coming wave of baby-boomer retirees who have assets to invest but want guarantees. * What's Next: As more mutual funds debut annuity-style products, annuity writers are working on some hybrids of their own. Learn More Fidelity Investments Life Insurance Co. A.M. Best Company # 09138 Distribution: Direct, walk-in centers, registered investment advisers Jackson National Life Insurance Co. A.M. Best Company # 06596 Distribution: Independent agents, brokers, banks For ratings and other financial strength information visit www.ambest.com. [GRAPHIC OMITTED]
The Battle for Retirement Business:
Mutual Funds vs. Variable Annuities
The Nest Egg
Defined-contribution plans and Individual Retirement Accounts have
grown fastest since 1995, while private defined-benefit plans have
grown slowly.
($ Trillions}
Annuities Government Pension Private Defined
Plans Benefit Plans
1995 0.6 1.9 1.5
1996 0.6 2.1 1.6
1997 0.7 2.5 1.8
1998 0.8 2.8 1.9
1999 0.9 3.1 2.1
2000 1.0 3.1 2.0
2001 1.0 3.1 1.8
2002 1.0 2.9 1.7
2003 1.1 3.4 2.0
2004 1.3 3.6 2.2
2005 1.4 3.8 2.2
2006 1.6 4.2 2.3
2007:Q1 1.6 4.2 2.3
2007:Q2 1.6 4.4 2.4
Defined Contribution Individual Retirement
Plans Accounts
1995 1.7 1.3
1996 2.0 1.5
1997 2.3 1.7
1998 2.6 2.2
1999 3.0 2.7
2000 3.0 2.6
2001 2.7 2.6
2002 2.5 2.5
2003 3.0 3.0
2004 3.3 3.3
2005 3.7 3.6
2006 4.1 4.2
2007:Q1 4.2 4.4
2007:Q2 4.4 4.6
1995 7.0
1996 7.8
1997 9.0
1998 10.3
1999 11.8
2000 11.7
2001 11.3
2002 10.6
2003 12.5
2004 13.8
2005 14.7
2006 16.5
2007:Q1 16.7
2007:Q2 17.4
Sources: Investment Company Institute, Federal Reserve Board, National
Association of Government Defined Contribution Administrators, American
Council of Life Insurers, and Internal Revenue Service Statistics of
Income Division.
Note: Table made from bar graph.
The Competitors
Total Net Assets
Of Mutual Funds
($Trillions)
Dec.07 Dec.06
Stock Funds $6.53 $5.91
Hybrid Funds 0.71 0.65
Taxable Bond Funds 1.31 1.13
Municipal Bond Funds 0.37 0.36
Taxable Money Market Funds 2.65 1.99
Tax-Free Money Market Funds 0.47 0.37
Total 12.04 10.41
Source: Investment Company Institute
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