Annuities Need to Be Part of Holistic Retirement Income Plan

According to a recent report from Cerulli Associates, more than half of annuity assets (55%) and annuity sales (55%) were attributable to qualified arrangements as of second quarter 2006, the highest level in more than 10 years. However, approximately two-thirds (67%) of total assets among those qualified arrangements were from individual retirement accounts (IRAs), and another quarter are from 403(b) plans. Cerulli’s data show that only small amounts are coming from 401(k), Keogh, and deferred compensation plans.

There has been some development of annuity options as an investment choice within 401(k) plans and it will continue, Cerulli noted. Forty percent of firms in 2006 told Cerulli there is a high likelihood they will consider this strategy in the future. Challenges to this strategy are the persistent view of 401(k) plans as solely accumulation vehicles and the reality that purchasing annuity units for future income is not intuitive to most workers, the report says.

Driven by demographic trends and the development of products that address guaranteed income and principal protection, annuity assets are expected to swell 39% to $2.6 trillion by 2011, according to predictions by Cerulli Associates. The research by Cerulli found that deferred variable annuities represent the largest portion of annuity sales, accounting for 68% of industry sales as of second quarter 2006, according to a press release. While variable annuities have shown rapid growth, fixed income annuity sales showed relatively little change, from 4% in 2001 to 11% during that period.

New Money?

Despite anticipated growth, Cerulli points out that a particular challenge to the growth of annuity sales is that less than one-quarter of both fixed and variable annuity sales come from money that is new to the industry. Much (about 75%) of the distribution of annuity sales is derived from third-party distribution, which requires a greater understanding of the mindset of advisers and wholesalers by the insurance companies. Successful distribution will require some work on the parts of insurers, Cerulli says; most notably, annuities need to be included “as part of a larger, advice-driven, income plan.’

Advisers have an opportunity to increase sales of annuities, Cerulli suggested, in recommending their usage as part of a retirement income strategy. Currently, 82% of advisers say they frequently or occasionally recommend systematic withdrawals as a retirement income strategy. “This is not surprising given their high comfort level with systematic withdrawals, as well as the insurance industry’s long time positioning of deferred annuities as tax-deferred accounts,’ Cerulli said. However, “variable annuities feature many characteristics that help make them a fairly smooth transition for retirees who are rolling over a portion of funds from a 401(k) plan–such as a variety of fund choices, flexibility in selecting and transferring between fund choices, and benefits that protect principal, income, or both.’

Advisers who do select annuities for clients tend to place greater importance on principal protection than retirement income, as 79% and 70% selected these factors, respectively, in 2006. Principal protection and retirement income were closer among fee-based advisers, at 70% and 66%, respectively, while commission-based advisers prefer systematic withdrawals to guaranteed withdrawals when recommending a decumulation option from a variable annuity.

In the selection of annuities, commission-based advisers were more likely (26%) to recommend variable annuities than fee-based advisers (9%). Further, nearly half (48%) of fee-based advisers will not consider annuities for qualified rollovers versus 19% of commission-based advisers.