Tag Archives: annuity

IRS guidance preserves annuity substitution rule

In a new Bloomberg BNA article, John Ehrhardt discusses the annuity substitution rule retained in Notice 2021-61 by the Internal Revenue Service. The rule will help actuaries value the liabilities for plans that pay lump-sum.

Here is an excerpt:

Because the MAP-21 [Moving Ahead for Progress in the 21st Century] rates apply to calculations for discounting plan liabilities but not to calculations for participant lump-sum amounts, it was unclear how practitioners should use the MAP-21 rates in calculating the present value of future lump-sum payments, Ehrhardt said.

“If the annuity substitution rule [had] not [been] upheld, most of the positive impact of the MAP-21 rates would have been lost for plans that pay lump sums,” he said.

Annuity alchemy

A new article in LifeHealthPro looks at the hybridization trend as it applies to retirement. Here’s an excerpt:

It’s crept onto your restaurant menu, into your pocket and your retirement portfolio, too. It’s called hybridization—taking distinct elements of one item and combining them with distinct elements of another to yield another distinct multifaceted product. Use that recipe in the culinary world and you get fusion food. Use it in the high-tech arena and the result is an all-in-one device called a smartphone. Apply it to financial and insurance instruments, and to annuities in particular, and the possibilities are seemingly endless.

The drive to innovate and deliver versatile solutions that address multiple client needs has put annuity providers in full hybridization mode. From the structure of the contract chassis itself, on down to other, more granular aspects of their products, insurers are borrowing and blending elements of various insurance and financial instruments to put a unique spin on their annuity offerings.

“Really what they’re doing,” explains Tim Hill, FSA, MAAA, principal and consulting actuary in the Chicago offices of Milliman, an actuarial consulting firm that provides insurance companies with product development guidance, “is mining these features from other things and using them with annuities. That approach seems to rule the annuity marketplace today.”

The result is an influx of specialized, sometimes complex products with hybrid structures, hybrid compensation models, hybrid benefits, even hybrid hedging strategies.

For advisors, this proliferation of hybrid annuity products and features means having a wider range of potential solutions to offer clients. But it also means more product education, observes Hill’s colleague Carl Friedrich, FSA, MAAA, also a principal and consulting actuary at Milliman. “There’s a real learning curve [annuity producers] need to climb when they’re working with some of these [hybrid] products.”

The full article is available here.

Are 401(k)s plus annuities all that new?

Jeff_MarzinskyThe retirement industry is abuzz with the hot topic of adding an annuity option to a 401(k) plan with the goal of creating lifetime income for your employees. To many this is a very new concept, right?

Well, no, it isn’t. In the past many employers sponsored traditional defined benefit (DB) pension plans, which provided much the same type of benefit: a stream of lifetime income at retirement, with the flexibility of a variety of payment options. The 401(k) plan was created in the 1980s to supplement the pension plan, enabling employees to make additional pretax deferrals to these plans. So, as you can see, we’ve had this type of benefit in the past.

Fast forward to today when, by combining a traditional defined benefit pension plan with your 401(k) plan, you’ve just created a “balanced” investment program for your employees.

You might consider the pension as the fixed-income portion of a portfolio generating stable returns and the 401(k) plan as the equity portion offering the potential for growth with some volatility. Wouldn’t that make a nice balanced investment portfolio?

So, the Combined Pension/401(k) Program provides lifetime income and a balanced type of portfolio for your employees, in addition to the other enhanced features of the traditional pension plan.

Wouldn’t it make sense to pair your 401(k) plan with a defined benefit pension plan?

Annuities as a solution to longevity risk

Kiplinger’s Retirement Report picks up on a sound retirement planning concept: Using an annuity to create a regular paycheck. Here’s an excerpt:

Finding a way to provide guaranteed income could be crucial if retirees fear outliving their savings. “Many people do not understand life expectancy,” says Noel Abkemeier, a principal at Milliman. Average life expectancy for a 65-year-old male is 84.2 years, and it’s 86.1 years for a 65-year-old female. But, says Abkemeier, “there’s a 50% chance you could live longer than lif expectancy–and it could be 10 to 15 years more.

No wonder there is so much apprehension from future retirees over outliving their benefits. So what’s a retiree to do? Going back to the Kiplinger piece:

Longevity insurance will maximize your retirement income at a time when you may need money to pay for long-term care and other medical expenses. It is best if you think about it as an insurance against living too long, rather than as an investment that may never pay out. Abkemeier recommends investing no more than 10% of your portfolio in longevity insurance, so you’ll have plenty of money for your other needs.

Of course an annuity is not the only way to go. The key thing is for retirees to recognize the risk and prepare accordingly.

New annuity standards

SPARK has announced a preliminary draft of new annuity standards. Here is a description from the article in Fund Action (login required):

The standardization document provides three models for firms offering annuity products:

– The Record Keeper Traded Service Model, based on the mutual fund model for recordkeeping and trading, would be used by firms structured like Prudential Retirement, which utilize the market value of the underlying investments in the insurance products to determine the guaranteed income amount.

– The Provider Traded Service Model, based on a self-directed brokerage concept, in which the annuity provider, rather than the recordkeeper, values the product. Firms such as Great-West Retirement Services and MetLife use this model.

– The Guarantee Administrator Model, which is similar to the Record Keeper Traded Model, would be used with firms like Milliman, which involve a lead insurer and a group of reinsurers, and design products collaboratively with recordkeepers and insurers.

How can an annuity fund long-term care?

The Chicago Tribune poses, and answers, this question:

Q. My wife and I are 84 and considering a retirement home. I read about a provision in the Pension Protection Act that would allow long-term care costs to be paid tax-free through an annuity. We have an annuity with a surrender value of more than $300,000. What part of this could help us pay our monthly bill?– R.M.

A. First, you need to evaluate whether you would owe taxes on annuity withdrawals, said Montgomery Taylor, an accountant and financial planner in Santa Rosa, Calif.

If the value of your contract is down to basically what you put into it (all too common these days), you could owe no tax, and thus have no need for a tax break, Taylor said.

That said, the Pension Protection Act of 2006 did create a tax break for annuity owners that began this year. While you don’t get a break on direct long-term care costs, you can qualify for tax-free annuity withdrawals that are used to pay for long-term care insurance premiums. If you end up needing the insurance, your coverage could equal two to three times the value of the annuity policy, experts said.

Some hybrid annuity/long-term care products have been available in recent years, though several insurers are developing new products to take advantage of the provision, said Carl Friedrich, a principal with Milliman, an insurance industry consulting firm.