Monday, July 20, 2009

Do Product Guarantees Help Recover Lost Retirement Income Ground?

Creating regular income that you can count on during retirement is taking on even more importance given the ground many baby boomers have lost during this deep recession.
There are ways to counter recession setbacks to retirement income, financial services executives say. Both executives interviewed offered options such as guarantees either in annuities or in products that are outside of annuities.
Guarantees have gained popularity with consumers over the last several years. But one prominent fee-only certified financial planner says that she doesn’t work much with these annuities but what she does see in potential clients who come to her should give potential buyers pause.
Income guarantees in annuities are becoming increasingly popular, according to Keith Golembiewski, assistant director-market research for individual annuities at Hartford Life Insurance Co., Simsbury, Conn. There are many different types of guarantees but typically a floor is guaranteed for regular payments. So, clients would take out their own money through systematic withdrawals and if the market is not performing well, the insurance component kicks in to make sure the guaranteed minimum amount is paid, Golembiewski explains.
The guarantee can help an annuity holder with the risk of living too long and not having enough income, he adds. But, the guarantees cause risks for insurers which companies must manage, Golembiewski states. For example, a company may put caps on withdrawals, require mandatory asset allocation or at a certain point require that you annuitize your contract, he continues. Annuitizing a contract occurs when the contract owner takes regular, periodic distributions.
Golembiewski advises that a few of the things you need before you make a purchase is trust in your advisor as well as the insurance company based on ratings, history and the length of time it has been in business. And, the client should know the reason why the product is being purchased, he counsels. Does the client need to protect income or maximize it? He asks. Other options that may suit a consumer’s needs are immediate annuities or fixed deferred annuities, Golembiewski says. He also says that the cost of variable annuity guarantees is increasing because insurers have to buy hedges or reinsurance and consequently, these higher costs will create a bigger drag on any potential annuity growth.
A variable annuity provides liquidity because it is still the customer’s money. But if a client decides to take out a greater percentage than was originally used to calculate regular income, then there may be less in the future to draw on, he explains.
Ed Friderici, managing director of alternative retirement solutions with Phoenix Cos., Hartford, Conn., describes another option: a standalone guarantee outside of an annuity that can be bolted on to retirement products including a 401(k), IRA rollovers and non-qualified retirement plans. The “bolt on benefit” can be turned on and off at will, he explains. And, there is no surrender charge that is associated with an annuity, according to Friderici. A surrender charge is assessed an annuity owner, if money is withdrawn before a specified period, for instance seven years. Often, surrender charges decline with each year into the surrender period. But not so with the “bolt-on benefit,” he continues.
But if the benefit is turned off, Friderici adds, and then turned back on later, if the market is down and costs to the insurer are up, switching it back on could cost more, he warns.
Eve Kaplan, founder and CEO with Kaplan Financial Advisors, LLC, Berkeley Heights, N.J., says that as a fee-only planner she does not work with variable annuities with guarantees. But when potential clients who have been sold them come to her, she says that “almost anything that I’ve ever seen is ugly.”
One problem, according to Kaplan, is the complexity of many of these products with “all the bells and whistles and elements on them.” Another problem, she adds, is the ambiguity of marketing with use of phrases such as “tax-sheltered.” And, even on fixed annuities, she says that typically, there can be a 4-8% commission.
Kaplan says that often an employer will not understand the product but will invite what she refers to as “the donut people” in to speak to workers. In this particular instance, the “donut person” was known to his former co-workers, and with donuts in hand and a new career selling annuities, has the trust of his former colleagues.
She speaks of one couple, potential clients, who were locked into a variable annuity because of surrender charges. The “donut man” had made a pitch to them. This VA paid 3% but had a mortality and expense ratio of 1.4%, which after taxes left the couple with about 1%. She says that this particular couple could have done just as well in a certificate of deposit.

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