Products that combine equity exposure, income generation and volatility protection may grow more popular among advisers, according to a retirement product executive.
"Advisers are looking more at packaged solutions that meet client needs," said Drew A. Denning, vice president of the retiree services group at The
Principal Financial Group Inc. of Des Moines, Iowa. Some of those solutions include mutual funds with income annuities, which provide both growth and income.
"It makes for a more robust conversation with the client," Mr. Denning added. "People don't realize that by buying the income annuity, you're not putting the stress of the withdrawals on the portfolio."
The insurer recently compiled a white paper exploring four methods by which advisers can help clients create a post-retirement income stream, including mutual funds with automated income payments, variable annuities with guaranteed-minimum-withdrawal benefits, income annuities and a combination of mutual funds and income annuities.
The white paper found that each method has its pros and cons. For example, variable annuities and mutual funds provide investors with account balance access, but the former may be loaded with such heavy fees that performance is adversely affected. The latter doesn't provide a consistent income stream or safeguard a client's purchasing power.
Income annuities may provide guaranteed income with no market risk, but new features to address inflation risk and other complications will affect the income received.
Among the most popular strategies are automatic withdrawals from the mutual fund, as well as a variable annuity with a withdrawal benefit, Mr. Denning said.
Though variable annuities historically have been big sellers, mutual funds with automatic withdrawals now offer advisers several new choices, including endowment-style and self-liquidating mutual funds. The endowment-style mutual fund is intended to last through the client's lifetime but is linked to account performance, so payments may vary. The self-liquidating fund is designed to expire within a fixed time span, typically in two-year increments.
"The base can vary, and the account value can jump from year to year, but the only guarantee is that it will liquidate," Mr. Denning said.
Advisers, skeptical of clients' beta-testing products, prefer strategies that combine the layering of annuities with the placement of other assets in equities and alternative investments for the longer term.
"Most of the annuities we use are deferred variable annuities with lifetime-income riders. We can ladder those," said Eric D. Brotman, a certified financial planner and president of Brotman Financial Group Inc. The Timonium, Md.-based firm manages just over $60 million.
Mr. Brotman ladders certificates of deposit and other fixed-income assets that have maturity dates to supply systematic payments. For target dates beyond 10 years, multiple deferred variable annuities, each with differently timed step-up dates, are preferable. Assets earmarked for use beyond 15 years can go into mutual funds, separate accounts or exchange traded funds.
"At that point, we're talking long-term equities, and we want equitylike returns," Mr. Brotman added.
Clients who receive pensions and can choose to receive either a lump sum or payments may also do well with a combination strategy. "Lifetime pensions don't fit if you have a short life expectancy," said John Visconti, a certified financial planner and senior adviser at UNFCU Financial Advisors LLC. The Long Island City, N.Y.-based firm manages $30 million.
Strategies utilizing annuities that make immediate payments have been commonly used at the firm.
"They may want to peel off a portion of that lump sum and convert it to an income annuity so that they have some stability and guarantee in their budget," Mr. Visconti added. If the money coming from the pension is qualified, it may be better to use non-qualified money in the annuity so that some principal is returned in each payment, reducing exposure to income taxes. Though the firm hasn't changed its annuity-based strategies because of recent volatility, Mr. Visconti prefers annuities and mutual funds that have no market correlation, such as real estate, commodities and energy. Client exposure would be about 20% among the categories, he said.
Mr. Denning warned advisers of clients' tendencies to go for provocative literature for annuity features. "A lot of it overplays the features you can get, but the likelihood of keeping up with inflation is limited," he said.
Still, Mr. Denning sees advisers' employing greater use of combination solutions to help provide income for investors. "You're going to see more planning tools to facilitate packages and recommendations," he said. "You can illustrate the value of the package [solution], making it easier to sell and easier to understand."
E-mail Darla Mercado at [email protected].
