Life cycle portfolios catching on in variable products

CHICAGO — Life cycle fever seems to be spreading from 401(k) plans to variable annuities. At ING Variable Annuities, for instance, assets in LifeStyle portfolios — which were introduced as ING-managed subaccounts in mid-2004 — reached $8 billion at the end of April, up from more than $4 billion at the end of 2005.
JUN 04, 2007
CHICAGO — Life cycle fever seems to be spreading from 401(k) plans to variable annuities. At ING Variable Annuities, for instance, assets in LifeStyle portfolios — which were introduced as ING-managed subaccounts in mid-2004 — reached $8 billion at the end of April, up from more than $4 billion at the end of 2005. The growth can be explained by the relative simplicity of these funds, said John Harline, senior vice president of variable annuity distribution for the financial-institutions channel at the unit of Atlanta-based ING U.S. Financial Services. “When you’re looking at variable annuity income solutions, LifeStyle funds make it easy for the client to understand and easier for the adviser to explain,” he said. But what’s boosting this trend, according to Peter Welgoss, a research analyst with Boston-based Financial Research Corp., is that the living-benefit riders attached to these variable annuities limit the investment options for investors. Life cycle funds comprise target risk funds, which are based on a person’s investment risk, and target date funds, which are based on when a person intends to retire. Growing at faster rate FRC’s data show that although the value of life cycle assets in mutual fund vehicles dwarfs amounts in variable equivalents, faster growth is occurring in the VA space. For instance, life cycle assets in mutual funds totaled $322 billion in March, a more than 203% increase over the $106 billion of assets in 2003. By contrast, life cycle assets in variable products meanwhile increased nearly 388% to $117 billion, from $24 billion. Most variable annuities that offer living benefits have exploded in sales and have restricted investors to a type of life cycle fund, Mr. Welgoss said. “The growth of these funds is attributable almost undisputedly to the restrictions that are within these living benefits,” he said. Mr. Welgoss thinks that the investing restrictions attached to these products are positive because they encourage investors to stay put. “Some companies allow 12 transfers within a certain amount of time,” he said. “[If investors] try to maximize their short-term gain, they’re really going against the grain of what it means to purchase a contract with a living benefit.” Another FRC researcher believes that life cycle funds would show growth even without the restrictions. “When you consider the popularity on the mutual fund side, I think these funds would be very popular even if they weren’t a residual of a living benefit,” said FRC research partner Anne M. Soucy, who is finishing a study about life cycle funds in variable annuities, which is scheduled for July release. She said that variable annuities are so complex that many investors want an easy choice about their investment options. “By the time it gets to the fund se-lection process, the client’s eyes have glazed over, and they just let the rep choose for them; lifestyle funds are a turnkey solution,” Ms. Soucy said. For its part, ING said that its restrictions are more liberal than some companies’. Mr. Harline believes that investor awareness is one reason for the popularity of such funds. “Many investors are already familiar with these investments, and it makes for an easier transition,” he said. Investors still should realize that life cycle funds have downsides, too, said Tom Modestino, senior analyst with Boston-based Cerulli Associates Inc. “Your investment risk can change 10 years from now, but you might still be in an aggressive style, and the date may not be great either, because your retirement date may change,” he said.

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