Conditions fertile for annuities if industry can connect with investors

A number of factors — DOL fiduciary, low interest rates and longevity — are coming together in favor of annuities if certain impediments are eliminated

Feb 1, 2017 @ 12:49 pm

By Evan Cooper

Most investors want guaranteed, pension-like income yet are reluctant to buy an investment that can provide it: an annuity.

That reluctance, the so-called annuity puzzle, may be closer to being resolved as a combination of factors — fewer sources of sufficient retirement income amid low interest rates, greater longevity and regulation — come together in ways that may tip the scales in favor of annuities if certain impediments are eliminated.

“There is probably larger latent demand for annuities than advisers and insurers realize,” said Michael Finke, dean and chief academic officer at The American College of Financial Services in Bryn Mawr, Pa. Many advisers currently don't have the tools to explain annuities properly or to make the client's purchase decision less stressful, he said.

Mr. Finke recently did a survey of investors asking about preferences regarding pensions and investments, and 50% to 75% of respondents preferred a pension to drawing income from investments, yet “most didn't understand that an annuity is essentially a private pension.”

Advisers and their firms, which traditionally viewed annuities as products that would divert client assets — and hence reduce fees — and whose income properties could be duplicated through bond ladders and other investment strategies, now are changing their minds, said Robert DeChellis, president of Allianz Life Financial Services in Minneapolis.

“What's different now is that the capital markets people at firms are coming to see that in an environment where interest rates may rise and equity values are high, annuities may be the only way to produce a higher degree of outcome certainty for part of the portfolio,” he said.

Mr. DeChellis, who says there is a strong argument for considering annuities a separate asset class, also noted that a greater interest in annuities is likely to be an unintended consequence of the new Department of Labor fiduciary rule.

“With the move to more fee-based business and a greater emphasis on financial and retirement planning, more advisers and clients will become aware of their need for retirement income and the level of assets required to generate that income,” he said.

(More: Advisers should be rewarded for their expertise, not sales skills)

“Annuities can reduce pressure on investment portfolios and can give advisers greater latitude with the remaining assets to create portfolios that better serve clients over the long run,” Mr. DeChellis said.

“The 'secret' ingredient in annuities, of course, is the mortality credits,” said annuity expert Moshe Milevsky, associate professor in finance at the Schulich School of Business at York University in Toronto. He said that due to this unique feature — resulting from a pooling of assets drawn down only by survivors, which produces greater income than a similar-size bond portfolio — annuities can play an important role in portfolio construction and providing retirement income.

But “the devil is in the details,” he said, referring to the complexity and costs associated with annuities, as well as the variety of offerings that all come under the annuity umbrella.

“When people talk about annuities, they can mean anything. Are we talking about SPIAs (single-premium immediate annuities)? Variable annuities? The word is meaningless,” Mr. Milevsky said. “Annuities can be important, but the industry has to remove the gotchas.”

(More: Complaints surface at Finra over buffer annuities)

Mr. Finke believes that the insurance industry should standardize annuity products so buyers better understand what they're getting and so insurers don't compete by adding features that increase complexity and befuddle advisers and clients alike.

Wade Pfau, a professor of retirement income at The American College, said that for many investors, annuities are probably most valuable — and can be best explained by advisers — as a secure supplement to Social Security benefits to cover a retiree's basic living expenses.

“Sequence-of-return risk can start digging a hole for retirees that can be hard to overcome without the mortality credits of annuities,” he said. “They provide bond-like returns without having to worry about longevity and running out of money.”

One type of annuity that many retirees might find attractive if they knew about it or understood it is the QLAC, or qualified longevity annuity contract. Approved by the government in 2014, QLACs are deferred annuities funded with an investment from a qualified retirement plan or IRA.

(More: Mary Beth Franklin: What baby boomers taking their first RMDs need to know)

“QLACs are the single most underused retirement investment,” said Mr. Finke. “You get the greatest bang for your buck by annuitizing later in life, and the QLAC structure provides a tax break by avoiding RMDs between ages 70-1/2 and 85. This tax savings is usually enough to cover the insurance company's expenses for anyone in a 28% tax bracket. It's like getting a valuable insurance product at no cost, and pricing is very competitive right now.”

Evan Cooper is a freelance writer


What do you think?

View comments

Upcoming event

Oct 22


San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print