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Capturing retirement rollovers: life insurers have a lot to offer retirees rolling over money from qualified plans. Some are beginning to offer not just products, but specific programs.

Life insurers are in a fight with other financial-services providers for the hundreds of billions of dollars each year in retiree rollover money. Their payout annuities and variable-annuity living benefits are winning some of it. But when it comes to the whole package of product manufacturing, financial planning and administrative record-keeping, only a few insurers are in the game.

"You can take this to the bank: Insurers are better positioned in this market than they are prepared for this market," said Eric Sondergeld, corporate vice president and director of retirement research, Limra International. "All of the financial services industry is looking at how to capitalize on the growing retirement opportunity, but if you look at who's winning in the rollover game, it isn't the insurers."

A recent Limra survey found not a single insurer among the top 10 companies in capturing market share of rollover assets. Three of them, Merrill Lynch, Ameriprise and Fidelity, own insurance companies, but Sondergeld said the vast majority of their rollovers probably are going into brokerage accounts and mutual funds rather than insurance products. The rest of the top 10 are mutual-fund companies, he said.

A couple of programs launched in May indicate, however, that insurers may pursue a more active role in capturing rollover money. Massachusetts Mutual Life Insurance Co. introduced its Retirement Management Account, a rollover IRA that offers a combination of mutual-fund asset management with the ability to incrementally buy into a fixed immediate annuity, all in a single account with one statement and a monthly single paycheck. And the Prudential Retirement segment of Prudential Financial announced it will offer its patent-pending Income Bridge product to any individual retiring with assets that can be rolled over from qualified Individual Retirement Accounts, defined-contribution plans or cash-balance plans. Income Bridge uses a period-certain payout annuity to allow people to defer Social Security payments, thus allowing retirees to maximize monthly Social Security income and minimize taxes once they start to collect. Previously, Income Bridge was available only to retirees in defined-contribution plans serviced by Prudential Retirement.

At year-end 2005, $3.7 trillion of assets were in Individual Retirement Accounts, $2.4 trillion in 401(k) plans and $1.3 trillion in other corporate defined-contribution plans, according to the Investment Company Institute. Limra estimated the total rollover opportunity in 2005 to be $285 billion. In 2010, it expects that rollover money will reach $422 billion.

MassMutual's RMA

Managing money in retirement can be a scary proposition for retirees and a complex task for advisers. The new MassMutual program seeks to make things less daunting for both by not only handling all the record keeping, but also by giving advisers and clients tools to help with making decisions, and it is neutral on the question of whether to withdraw from assets or annuitize them. The program's goal is to generate a "solid, predictable, sustainable retirement paycheck," said Spencer Williams, senior vice president of the Income Management Group. "The most important thing is that that paycheck shows up in the mail every month once you're retired. We're not trying to shoot the lights out. If you have additional monies, put them into a different program and manage them for above-market returns. But for your monthly income check, keep it simple"

The RMA does just that by providing a choice of four model mutual-fund portfolios: growth, moderate-growth, conservative and income. They contain Oppenheimer mutual funds, which are owned by MassMutual, but the portfolios are developed by Kanon Bloch Carte, an independent third party, and are rebalanced quarterly. The RMA's other product component is the Flexible Benefits Annuity, which is incrementally funded with assets transferred from the mutual-fund portfolios in a process known as annuity laddering. Many independent advisers recognize the value of laddering, but have had to buy a separate single-premium immediate annuity with each purchase, said Jerry Golden, corporate vice president of the Income Management Strategies Division and the inventor of the RMA. "Rather than the inconvenience of selling 15 little SPIAs, or whatever you might attempt to do, it made a lot more sense to do it within a single flexible-benefit annuity contract,' he said.

The program's appeal is that the client and adviser retain control of assets and decide how much to turn into secure income--and how fast-within the same program. A retirement income planning tool that includes Monte Carlo analysis provides continuous guidance on withdrawal rates and income generated by annuity purchases. "What we have discovered in today's environment--and that can change in the future--is that the strategy that seems to work most effectively is gradual funding of the annuity over time, which has both financial and psychological advantages because you're not committing all of your funds at a single time," said Golden.

The final piece is the administrative system. Williams said the new system is analogous to the change more than a decade ago in 401(k) plans, which originally were valued quarterly along the lines of defined-benefit pension plans. But then Fidelity invested heavily in technology and built dally valuations, and the 401(k) market took off. "We actually price the annuities every day" he said.

The program may also represent an evolution of moving retirement solutions from the realm of the academic to the adviser to the institution. One example would be in the responsibility for calculating and administering the right sustainable income, typically 4% or 5% of assets. "That happens to be an actuarial calculation that is very much personalized and a function of where the market is at any point in time,' said Golden. "That's just not going to be a solution we see the adviser developing. And advisers ability to evaluate strategy that involves a combination of mutual funds and immediate annuities. They may have a gut feel that laddering annuities makes sense, and this is a good or bad time to buy one, but they don't have an evaluation system that we have that essentially ranks those strategies every time they look at them."

"Frankly, advisers have a hard time keeping track of things for their clients,' said Williams. "We keep everything on a Web-based server so that advisers have clients' plans at their fingertips at all times. That's in addition to our required annual review. Or more likely, retired clients are going to have life events--death of a spouse, a residence change, illness, recovery, remarriage--and advisers have the ability to review plans with clients as often as necessary, and the information is sitting right there."

The result is that rather than spend time in administration, advisers can work with clients to understand important trade-offs in retirement--how much of their income to withdraw from growth portfolios vs. how much to guarantee as income, Williams said.

Advisers earn an advisory fee paid on the value of assets in mutual funds that continues as a trail. They receive a commission on the annuity and a small, asset-based trail as compensation for ongoing service obligations to clients, Golden said. Once in place, those earnings should continue because of a high likelihood of client persistency in program participation.

Prudential's 'Income Bridge'

The premise of Prudential's Income Bridge program is that there are advantages to postponing the start of taking monthly Social Security payments. The program uses a fixed immediate annuity to bridge the gap from the earliest starting date, age 62, to a future date. Usually, that is to age 70, when payments are greatest, but some in the program do not want to commit a large enough lump sum to fund all eight years. In those instances, Prudential will create an annuity for the length of time the lump sum will buy, often in the area of an annuitant's normal retirement age. That age is 66 for people born from 1943 to 1954, but it rises incrementally to 67 for people born in or after 1960.

"The conventional wisdom has always been to delay taking any money from your IRA as long as possible because it's tax-deferred, but we were able to prove that for at least a good number of people, that doesn't hold true," said James Mahaney, vice president of Prudential Retirement and creator of the Income Bridge Approach. "So we built illustration software to show people how it would affect their individual situation"

Postponing helps in several ways:

* Monthly income could double by waiting from age 62 to 70.

* Social Security income is taxed at a lower rate than IRA income.

* It creates a positive impact on spousal benefits and benefits for the surviving spouse.

* Earned income (from a job) while taking Social Security payments before normal retirement age will reduce the payments $1 for every $2 earned up to the current threshold of $12,480.

* Taking income from IRAs and/or defined contribution plans while collecting Social Security generates higher taxable income and will therefore trigger higher taxation of Social Security benefits. Under Social Security's income formulas, for example, income in excess of $32,000 for couples filing jointly will cause 50% of Social Security benefits to be taxed. Income greater than $44,000 will cause taxation of 85% of benefits. Even tax-free municipal-bond income counts toward the calculation. Mahaney said that withdrawing money from qualified plans while drawing Social Security can result in a marginal tax rate as high as 46%, a situation he and others refer to as a "tax torpedo"

A key idea is that Social Security is taxed less. "So the thinking is that if you doubled the amount of Social Security you received at age 70 and beyond, you would drastically reduce your taxes because you wouldn't have the IRA income any more," Mahaney said. The concept would be to trade future IRA income for future Social Security income. And for people who don't have defined-benefit pension plans and who need some form of guaranteed income, enhancing Social Security payments could be a great idea, he added.

The program charge is a one-time fee equal to 1.5% of assets to be annuitized. There are no ongoing explicit expenses. Mahaney said it would be challenging to compensate advisers "in a way that we would need to do for their time" and still deliver a "high-quality product during the bridge time." For that reason, Prudential is not selling the program via face-to-face distribution with a commission.

"Our challenge is going to be generating enough interest out there to drive people to us,' he said. "We're keeping it in-house in a specialized kind of advisory boutique under my guidance."

Mahaney said he expects fee-only advisers will refer clients to the program.

Non-Insurers are Distributors

While insurers may not be fully prepared for the rollover market, they are better positioned with annuities, life insurance, long-term-care insurance and Medicare Supplement products that other financial-services providers don't manufacture. "Actually, if you look at this from a distribution perspective, not being listed in the top 10 isn't necessarily bad" said Sondergeld. "Every company listed in the top 10 can be seen as a distributor. "The lion's share of insurer sales have been through independent distribution, and Sondergeld said a large percentage of those sales are from rollover money.

From that standpoint, insurers may want independent distributors to know they are in the game. Evidence of that came in April, when Jackson National Life Insurance Co. announced a rollover campaign, "Choose Your Direction." Jackson National offers a wide variety of life insurance and annuities. The products come "unbundled," meaning that advisers and clients choose and pay for only the features they want.

Before the program, the only mention that the company could handle rollovers from qualified accounts was in one of its variable-annuity prospectuses. "That was one of the primary reasons for the campaign," said Luis Gomez, vice president of marketing strategy. "We wanted to make sure our advisers know that we can manage rollovers, that they're educated, and that they know we can provide the tools that are necessary for them to become retirement planning specialists or experts."

The company has assembled a dedicated team of retirement specialists to field adviser inquiries and the six-member Seminar Systems Unit to help advisers deliver group educational presentations. Andrew Silver, public relations director for Jackson National Life Distributors, said the unit develops turnkey presentations. "The unit will put together presentations specially for an adviser's audience" he said. "It will set up the whole seminar, get the venue, do the invitations from a prospecting list we provide or an adviser's client list, provide a guest speaker, and provide some support for that adviser to talk to that audience so he or she can go out and demonstrate expertise on retirement-planning issues." Gomez said a key component of the program is to educate advisers enough that they can construct and perform seminars on their own.

"Everybody in the industry is doing something about the rollover market, or will" he said. "The opportunity is too large to ignore. As the opportunity increases, so will the competition ... We want to let our existing producers leverage the resources we have so they can target the opportunity as well"

Key Points

* Insurance products are well positioned for retirement planning, but insurers' distribution partners are more likely to create retirement plans.

* Some insurers, however, are constructing programs specifically aimed at increasing their roles in retirement planning at the individual level.

* Given the limited time and resources of many advisers, these new roles may help improve both client and adviser outcomes.

* They may also allow insurers to attract and retain control of assets over longer periods.

A New Approach to Retirement Income

MassMutual's new Retirement Management Account includes four key elements. The program includes model portfolios, flexible-benefits immediate annuities, and planning and account services. Investors may take regular withdrawals from the model portfolios/cash reserve or periodically invest funds into the annuity, which provides reliable income.

Projecting Income

The management account of the RMA will generate a multi-page plan summary. In this case, the program determined that a married couple, each age 62, could expect these levels of monthly income at the listed success probabilities based on investing $500,000 into the program with the intention of withdrawing $2,158 a month at age 66.

Source: MassMutual

Benefits of the Prudential Income Bridge Approach

This comparison demonstrates why beginning Social Security benefits at normal retirement age or even age 70 by first drawing down IRA assets is much more tax efficient. In the first scenario, a married couple begins taking Social Security and IRA withdrawals at age 62. If IRA income pushes them into the 25% tax bracket, 85% of Social Security income is taxable. (The Combined Income formula adds all income sources to Social Security income to determine modified adjusted gross income; for 2006, on amounts in excess of $44,000, 85% of Social Security income is taxable.) In the second scenario, the Combined Income formula still applies, but absent the IRA income, Social Security income is taxed at half the rate.

Opportunity in the Pension Rollover Market

Figures are based on the money that became available for lump-sum distribution each year. Values for 2005 through 2010 are estimates based on an 8.2% annual growth rate. ($ Billions)

Learn More

Massachusetts Mutual Life Insurance Co.

A.M. Best Company # 06695 Distribution: Career agents, LTC specialists, independent agents, wirehouses, banks

Prudential Insurance Company of America A.M. Best Company # 06974 Distribution: Career agents, Allstate agents, independent agents and brokers, broker-dealers, banks

Jackson National Life Insurance Co. A.M. Best Company # 06596 Distribution: Independent agents, brokers, banks

For ratings and other financial strength information about these companies, visit
First Scenario: Taking IRA Income
and Social Security at Same Time

IRA Income $1.00
Tax Rate 25%
IRA Tax (A) 0.25
Additional Social Security Subject to Tax $1.00
of Social Security Income Subject to Tax 85%
Taxable Social Security Income 0.85
Tax Rate 25%
Social Security Tax (B) 0.21
Total Tax in Cents (A+B) 0.46
Total Tax in Percentage 46.25%

Second Scenario: Replacing IRA Income
with Delayed Social Security Income

Social Security Income $1.00
Combined Income Formula x 50% = 0.50
of Social Security Income Subject to Tax 85%
Taxable Social Security Income 0.43
Tax Rate 25%
Social Security Tax 0.11
Total Tax in Cents 0.11
Total Tax in Percentage 10.63%

Source: Prudential Retirement

Retirement Assets
By Plan Type

As of year-end, 2005

Type of Plan Assets

Individual Retirement Accounts $3.7 trillion
State Local Government Plans $2.8 trillion
401 (k) Plans $2.4 trillion
Corporate Defined-Benefit Plans $1.8 trillion
Annuity Reserves $1.4 trillion
Other Corporate Defined-
Contribution Plans $1.3 trillion
Federal Defined-Benefit
and Thrift Plans $1.1 trillion
Total $14.3 trillion *

* Note: Total takes into account rounding of asset

Source: Investment Company Institute
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Article Details
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Title Annotation:Retirement Products: Life
Comment:Capturing retirement rollovers: life insurers have a lot to offer retirees rolling over money from qualified plans.
Author:Panko, Ron
Publication:Best's Review
Geographic Code:1USA
Date:Aug 1, 2006
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