Hit the Gas.
The recent debate among state insurance commissioners as to the regulatory status of contingent deferred annuities has focused advisors' attention on new solutions that, if demand takes off, could significantly boost the market for insurance products in the retirement income planning space. Such an expansion, sources tell National Underwriter, is potentially a boon for life insurers marketing to fee-based financial professionals who have historically shunned annuities because of the products' perceived high cost and complexity.
CDAs are meant to appeal to producers who do not specialize in annuities, explains Bruce Ferris head of sales and distribution, Prudential Annuities, a unit of Prudential Financial, Newark, N.J. Examples of non-annuity producers are fee-based advisors who offer advice and services for mutual fund wrap accounts, separate managed accounts, and fee-based platforms with broker-dealers. CDAs complement such advisors' ability to provide asset selection, broad diversification recalibration and adjustment of investments.
Moreover, CDAs offer protection against longevity risk and sequence of return risk for assets that are being used for retirement income, says Raymond Benton, a Denver, Colo.-based certified financial planner. The benefits of CDAs, he says, are similar to those provided by variable annuities with GLWB riders and are effectively like owning the rider without the rest of the contract.
CDAs offer investors a new form of principal protection: a guaranteed lifetime withdrawal benefit that guards investments against losses during market downturns. The twist is you don't have to buy a conventional variable annuity and GMWB rider to secure the guarantee. The insurance protection hitches onto a mutual fund or exchange-traded fund from a brokerage firm, and so the underlying asset is held outside of the life insurance company.
The CDA provides the many benefits of a variable annuity with a living benefit: guaranteed lifetime income and annual lock-ins and step-ups--all without the typical downside of high surrender charges, limited underlying fund options, and base mortality and expense charges. And because of the compensation method--the charge for the insurance protection is generally a fixed percentage of assets under management, the percentage varying with the equity-to-non-equity ratio of the investment portfolio--the product is well suited to the fee-based advisor's business model.
The market trajectory for CDAs is potentially huge, particularly for guaranteeing exchange-traded funds (ETFs). In May, market research firm Strategic Insight reported total ETF net inflows of $58 billion for the first four months of 2012, a pace that could result in the sixth straight year of $100 billion or more in annual net inflows to U.S. ETFs. Experts say that a significant number of investors who are channeling retirement assets into these funds, especially those in or near retirement, may be amenable to adding a CDA to the ETFs to protect their assets.
Prudential's Ferris says that interest in the products among fee-based advisors has risen markedly since the 2007-2009 recession, when many investors' retirement portfolios were pummeled by the declining equity values. One measure of the market fall, the S&P 500 Index, plummeted by 35%. Prudential itself is actively developing a CDA it intends to bring to market soon.
Other companies that have debuted, or plan to bring, CDAs to market--Nationwide Mutual Insurance Co., Great-West Life & Annuity Insurance Co., Transamerica Life Insurance Co., among others--are mostly targeting individual mutual fund and ETF investors in the non-qualified market. But company execs say the products could also prove popular among participants in employer-sponsored retirement plans, such as 401(k) and 403(b) arrangements.
A key benefit is that the qualified plans enjoyed preferential status under IRS rules, so mutual fund and ETF assets--as in the case of VAs--grow tax-deferred. What is more, large companies may be able to negotiate competitive premiums for a GLWB option on behalf of their employees.
"Assets that accumulate in a 401(k) or 403(b) already are tax-qualified," says Chris Bergeon, vice president of Greenwood, Colo.-based Great-West Life & Annuity Co. "So you don't need a VA to get preferential tax treatment. That makes an income guarantee an attractive solution for customers rolling from a 401(k) into a CDA-protected IRA, which retains the tax-deferred growth status."
The Products Up-Close
One example of CDAs on offer in the qualified plan arena, as NU reported in April of 2011, is the result of an unusual partnership between New York-based investment management firm Alliance Bernstein and three life insurers that collectively guarantee the product: AXA Equitable, Lincoln Financial Group, and Nationwide Financial. As the default option of a qualified plan, the CDA rides on a target date mutual fund that resets the portfolio's asset mix according to a selected time frame. The insurance provides plans participants with a guaranteed lifetime income stream and access to their account balances at all times.
More common among the new offerings is Great-West's Secure Foundation Guarantee, a GLWB that sits atop the company's Maxim Secure Foundation Balanced ETF Portfolio, a fund of funds that invests in exchange-traded funds from investment management firm The Vanguard Group Inc., Malvern, Pa. While protecting against market dips, the GLWB locks in gains by stepping up the benefit base on yearly anniversaries of the product's purchase. Assuming an account starts at $250,000, rises to $300,000 six months thereafter, then closes the year at $275,000, then the account's highest value--$300,000--becomes the new benefit base. When the client begins distributions, the last of the step-ups is used to determine the guaranteed lifetime payout rate.
Great-West's Bergeon says the insurance guarantee gives normally risk-averse clients the security to stay invested in the capital markets and not worry about a market downdraft eating into their nest egg. For such clients, this sense of security provides a large advantage over fixed annuities.
Great-West began distributing the product to individual investors on a pilot basis through an unnamed bank-affiliated broker-dealer. Assuming that product positioning and operational processes meet company expectations, Great-West will add other bank-affiliated broker-dealers this summer.
Also targeting individual investors with its CDA is Columbus, Ohio-based Nationwide Financial. Launched in July of 2009 and dubbed Select Retirement, the fixed income annuity is an addition to Nationwide's Select Unified Managed Account program. Select UMA offers clients, via a single account, diversified asset allocation strategies and the ability to construct portfolios with a mix of separately managed accounts, mutual funds and/or ETFs. The program also boasts account administration and performance reporting services.
Cathy Marasco, an assistant vice president for product management at Nationwide, says the company is now marketing the CDA to fee-based investment advisors through brokerage firm Morgan Stanley Smith Barney. Developing the insurance product for a third-party investment platform, she notes, posed challenges to the insurer.
"Because assets are held at Morgan Stanley Smith Barney, we needed to create a solution for capturing all of the data to manage the insurance guarantee," she says. "You typically don't have to do that with a traditional annuity because all of the assets are held by the insurer. But from a hedging and reserving perspective, we're managing the risk like any other GLWB."
A greater challenge now facing Nationwide, as well as other insurers that have developed CDAs, is building consumer interest in their products. One factor inhibiting demand is beyond the companies' control: limited availability nationally because many state insurance regulators haven't yet approved the products for sale within their jurisdictions.
Why? Until recently, observers say, a stumbling block has been the lack of clarity from the National Association of Insurance Commissioners as to whether the hybrid products constitute insurance. Many critics, MetLife among them, questioned their status because insurers don't hold the invested assets.
As reported by NU, the NAIC ruled in March that CDAs are insurance. The commissioners also established a subcommittee to determine whether reserving and capital rules requirements for CDAs need to be revised to ensure the product providers can make good on the guarantees.
"Since the NAIC ruling, more states have approved the products," says Great-West's Bergeon. "We're now confident that CDAs as a solution have a place for providing guaranteed lifetime on a broader basis."
Adds Nationwide's Marasco: "We were one of the first companies to come out with a CDA, but it took additional time to get approvals from the SEC and the states where we can now market the product. [In the wake of the NAIC decision] we are definitely looking to secure more state approvals."
A Big Question Mark
Whether fee-based advisors will approve of the products en masse remains uncertain. Steven Kaye, a financial planner and president of AEPG Wealth Strategies, Warren, N.J., observes that CDAs are the "best kept secret in the investment community" because most registered investment advisors don't know about the product. He adds that CDAs are an "exciting concept," and that the products are certain to garner more interest among financial professionals as carriers get the word out and as the market matures.
Yet, Kaye concedes that he hasn't sold any CDAs to date, in part because he's still vetting solutions from the manufacturers. When he has broached the products with clients, he says, prospects expressed interest in the insurance guarantee, but failed to commit to buying because of the added cost.
A primary focus of Kaye's firm, RetirementOne Transamerica, a product developed by Aria Retirement Solutions, comes with a 1% of assets under management fee for portfolios evenly between equities and non-equities. Should a client elect a 60% equities to 40% non-equities mix then, Kaye says, the AUM charge increases to 1.15%.
The fees, adds Don Goldberg, a vice president at AEPG Wealth Strategies, could be met with skepticism from some advisors who hail from the investment world and are loath to degrade the price-performance of portfolios for which they already charge a fee to manage.
"What I see is a philosophical divide between life insurance agents schooled in the value of guarantees and financial planners who are chiefly focused on growing clients' portfolios--in part by keeping costs to a minimum. Among many of these planners, there is disdain for adding an 'expensive' rider on top of an already expensive product: a deferred annuity.
"The CDA represents a mid-point on the costs continuum, where the expense is not so great as that of a conventional variable annuity, but the level of security is greater than that of a stand-alone mutual fund. Planners may come around to the notion that the CDA is suitable for a certain portion of their clients, but this will take time."
Herb Daroff, a partner at Baystate Financial Planning, Boston, agrees, adding that the likely buyers of CDAs will be conservative investors who view the products as a preferable alternative to lower-yielding bonds and CDs. He questions, however, whether people with a high risk tolerance for market volatility would be prepared to add an insurance component to their mutual fund or ETF portfolios.
"The more aggressive investors won't buy a CDA or VA--they'll just invest in the market," says Daroff. "But if a client is totally averse to a VA and favors investing in bonds for safety, then the CDA would seem to be a more appealing alternative because of the potential for higher yields."
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|Publication:||National Underwriter Life & Health|
|Date:||Jun 1, 2012|
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