The Wall Street Journal reports on an emerging approach to annuities that may include lower fees for participants. Here is the quick explanation:
A longstanding beef against variable annuities is their steep cost. A big plus of exchange-traded funds is their ultralow cost.
Finally, momentum is growing to pair the two financial products in innovative ways, a trend consultants say is good for many people who are trying to save for retirement.
The products now emerging have lower fees, though it’s important to understand that the participant still needs to fund the guarantee:
The ValMark-Milliman approach still awaiting SEC approval is innovative in that it moves part of the financial-hedging program from the insurer’s balance sheet into ETF portfolios. By taking that off the insurer’s books, costs can be lowered for consumers, [Milliman principal Ken] Mungan says. That’s because the insurer doesn’t have to raise prices to compensate for the punitive effect on reported earnings per share that sometimes results from holding financial hedges, under generally accepted accounting principles.
“The consumer is paying for the hedge asset no matter what,” Mr. Mungan says. “But here, the consumer buys and owns the hedge asset at a cheaper price” through the ETF portfolio itself.
For more on exchange-traded funds, go here. For more on the potential for retirement security from variable-annuity-like products, go here.
Penton Insight looks at the resurgent popularity of variable annuities, and in particular the desire for guaranteed lifetime withdrawal benefits. Here is an excerpt:
One of the most popular variable annuity features is the guaranteed lifetime withdrawal benefit. No matter how the underlying investments perform, policyholders typically are guaranteed at least 5 percent of their benefit base in income annually for as long as they live. Eighty-seven percent of those who buy variable annuities elect this rider, LIMRA says. “From my perspective, variable annuity sales are definitely picking up,” says Kenneth P. Mungan, actuary with Milliman, a Chicago-based actuarial firm. “Customers are clearly attracted to the guaranteed living benefits, and I expect that trend to only increase over time.”…
An article in the Retirement Income Journal looks at the de-risking going on in variable annuities:
Coincidentally or not, the variable annuity guaranteed living benefit arms race ended only about one year ahead of the December 31, 2009 deadline when issuers of those products must adopt changes in the way they account for the risks of those products and the level of reserves they must maintain for them.
A recent report from Milliman, A Discussion of Actuarial Guideline 43 for Variable Annuities, explains this changing situation and recommends ways that issuers could simplify their products to minimize a potential increase in reserves.
Read the full article here. Read the Milliman report here.