Cutting fees becomes VA insurers' mantra

Jun 20, 2005 @ 12:01 am

By Gary S. Mogel

NEW YORK - Facing declining sales and tougher competition, variable annuity insurers are focusing on reducing their fees, according to industry observers.

The fee cuts cover the insurers' mortality and expense risk, including commissions if they pay commissions, and aren't related to the additional fees charged by the mutual funds in which the annuities are invested.

Last month, Protective Life Insurance Co. in Birmingham, Ala., introduced a variable annuity with fees that decrease for clients who keep their contracts in force with the company.

Starting on the contract's eight-year anniversary - which is when the surrender charge period normally expires and exchanges are often contemplated - there is a "persistency" fee credit of 0.40% of the annuity value. There is another 0.40% credit for each anniversary thereafter.

Protective's mortality and expense fee, including commission, is 1.05%, so the annual fee would be reduced to 0.65%, said Eric Miller, vice president and national marketing director. According to Chicago-based Morningstar Inc., the average asset-based VA fee is about 1.35%.

"If the client puts at least $250,000 in the annuity, the persistency credits begin on the first anniversary," he added.

Competitive edge

The trend toward lower fees has nothing to do with current or anticipated regulatory scrutiny of variable annuities, according to Mr. Miller. "As with any pricing issue, it is about competition and driven by the value to the insurer of having long-term clients," he said.

Competition in the VA field is heating up, as insurers face dwindling sales. New VA sales in the first quarter were $31.3 billion, down 9% from the first quarter of 2004, according to figures released this month by Variable Annuity Research and Data Service, part of Morningstar.

Dallas-based Jefferson National Life Insurance Co. charges the lowest VA fees.

The company charges a flat fee of $20 a month, regardless of the amount of assets in the account. The annuity, which has no commission expense built in, is geared to fee-only advisers.

Jefferson National's annual fee of 0.24% can be kept low because the company has a web-based platform, resulting in much lower administration and account management costs, said Patrick Ferrer, national sales director. He added that additional savings are expected from the higher client retention rates due to the low fees.

1035 exchanges

"Since so much of variable annuity premium flow is now in the form of transfers from one insurer to another, more attention is being paid to fees," said Patty Reiners, assistant vice president for Ameritas Direct in Lincoln, Neb. "Advisers have to determine whether a variable annuity 1035 exchange is in the client's best interest, and lower fees are an important factor in that determination."

The no-load, no-commission variable annuity Ameritas offers has an asset-based annual fee of 0.55%.

In the past few years, VA insurers have competed mainly by offering more and better income guarantees and other product enhancements, but that is changing.

"Guarantees, including minimum income, withdrawal and accumulation benefits, were a big selling point when the stock market was going down," Ms. Reiners said. But with the stock market heading up, they aren't as important as they used to be, and they are adding costs to the product because they are an additional benefit, she noted.

VA enhancements devised over the past several years have been viewed by some in the industry as distracting from the annuity's core purposes of providing periodic income and making certain that retirees don't outlive their savings.

In addition to cutting fees, insurers are devising more creative methods of charging the fees.

Prudential Financial Inc., based in Newark, N.J., offers persistency credits, reducing fees by 1.0% of the contract value after three years if the client agrees to the start of another three-year period during which withdrawal penalties may be applied.

Another 1% reduction is available on the six-year anniversary, with the same requirement of the client agreeing to the start of another three-year withdrawal period. The reductions reduce the annual fee to 0.65%, from 1.65%.

Northwestern Mutual Life Insurance Co. in Milwaukee has developed a variable annuity with fees that decrease based on the amount of assets in the plan. The fee is 4.5% for the first $100,000, 2.0% for the next $400,000, 1.0% for the next $500,000 and 0.5% for any amount surpassing $1 million.way for other companies, industry experts say.

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