Lifetime-income options pose benchmarking puzzle

As insurers find new ways to provide workers with a steady stream of income through their retirement plans, financial advisers are grappling with how best to benchmark these products against one another.

With more than 10,000 baby boomers turning 65 each day, insurers are scrambling to develop products suited for retirement plans. Many are turning to annuities or annuitylike vehicles that offer retirees a guaranteed income for life.

For advisers who specialize in helping plan sponsors pick and choose what goes into their retirement plans, these new products pose a unique challenge.

As fiduciaries, advisers must justify to their plan sponsor clients their rationale for picking one product over another. Often, that justification is based on performance, costs, risk and other factors.

The difficulty in benchmarking lifetime-income products stems from the fact that no two are exactly alike. In fact, advisers often say that comparing three lifetime-income products is like comparing apples and oranges and bananas.

“The more innovation we see, the more complex it becomes to select, monitor and benchmark,” said Scott Matheson, senior director of investment research at Captrust Financial Advisors.

In a way, lifetime-income products are going through what target date funds went through when they arrived in the 1990s. Back then, comparisons were difficult because each fund has a different age-based risk control called a glide path.

Today, with the proliferation of those funds, there is more standardization among them — making comparisons easier.

Experts point to three basic models for lifetime-income products found in retirement plans.

For example, AllianceBernstein LP’s Secure Retirement Strategies backs an employee’s target date fund with an income guarantee provided by a trio of insurers. Competitor BlackRock Inc. uses a target date fund and incrementally buys into a fixed deferred annuity.

FIDUCIARY CHALLENGE

Meanwhile, The Hartford Financial Services Group Inc.’s Lifetime-income Benefit is a fixed deferred annuity that allows customers to buy income units to be used in the future.

“It’s a challenge for fiduciaries to figure out what to choose, and the factors you need to consider are specific not only to the plan but to each fund, because they work differently,” said Bradford P. Campbell, who is of counsel at Schiff Hardin LLP.

In practice, advisers said, comparing these lifetime-income products is a far cry from weighing funds against one another.

“It’s hard to equate that you’re getting this type of guaranteed benefit and this rate of return,” said Jim O’Shaughnessy, managing principal at Sheridan Road Financial, which manages $1.5 billion. “It’s not like comparing one large-cap fund to another.”

Another issue is the fact that the products were released so recently.

Most platforms are designed to fit mutual funds and aren’t prepared to handle many of the new annuity-infused innovations. As a result, the availability of the products is limited, and a lifetime-income option that an adviser wants to present to a plan sponsor may not be available.

“Plan sponsors feel they don’t need to consider [lifetime-income products] if they’re not on the platform,” said Dorann Cafaro, senior vice president of Fiduciary Benchmarks Inc. and founding member of the Institutional Retirement Income Council.

Meanwhile, plan sponsors and advisers might be inclined to assess the annuitylike products the same way they’ve been examining mutual funds, with an emphasis on cost.

But participant fee disclosures mandated by the Labor Department demonstrate the fact that mutual funds and lifetime-income products are not to be measured using the same yardstick.

Mutual funds’ returns, benchmarks and operating expenses must be revealed to employees, but lifetime-income products must show the pricing factors, objectives and any fees or restrictions.

“Plan sponsors always ask about the cost; they’re used to framing everything in an apples-to-apples way,” said Mark Fortier, head of product and partner strategy at AllianceBernstein LP’s defined-contribution unit. “They think if they’re paying more for one product, then the comparison is simple in that it costs more.”

FEES VS. MEETING NEEDS

Instead of making fees the focal point, advisers and plan sponsors ought to assess the unique features of lifetime-income products, and how they meet the given plan’s needs.

“When we define the features that are critical to the plan, we compare cost, liquidity and withdrawal rates,” Mr. Fortier said. “You can’t line up all the products and look at it on a fee basis.”

Advisers have established their own methods for broaching the topic with plan sponsors.

Mr. Matheson evaluates lifetime-income products by comparing the historical performance of the underlying investments, studying fees and performance. He also compares the charges for the benefits.

George Fraser, managing director at Retirement Benefits Group, an affiliate of LPL Financial LLC, noted that comparisons have centered on fee disclosure and features.

“You let the employee know on the front end the cost associated, and then it becomes a features- benefits discussion,” Mr Fraser said.

Email Darla Mercado at [email protected]