Let's face it -- traditional variable annuities (VAs) are due for an overhaul. Everyone, from consumer advocates to industry watchdogs to regulators, has weighed in on the shortcomings of high-cost VAs. Lackluster performance. Improper sales practices. Nonexistent disclosure.
Are your clients' VAs in need of repair? Consider the low-cost VA. It can deliver all the benefits of tax-deferred growth for long-term savers without the drag on performance.
Why give low-cost VAs a second look? First, millions of baby boomers are now in search of retirement-saving alternatives. Low-cost VAs are a cost-effective way to save more. Second, low-cost VAs are an ideal fit for the many producers who are making the move to a fee-based practice.
Out with fees and complexity
The "cost of complexity" has always been critics' chief gripe about traditional VAs. Expensive asset-based fees charged for complicated riders can stifle growth and erode principal. High commissions can lead to steep surrender charges, aggressive sales tactics, and conflict of interest. All told, due to the cost and complexity of traditional VA fees, consumers are paying at least $15 billion each year in insurance fees alone1.
But with low-cost VAs, it's possible to give back billions to consumers with simple products that strip away unwanted fat.
Low-cost VAs eliminate complex riders, commissions, and surrender charges. Many cut basic fees for service, administration, and transactions. They slash M&E and other insurance charges to rock-bottom levels -- in some cases, to less than one-quarter of the national average.
Do the math to see for yourself
So how do the new low-cost models stack up? Based on the industry average insurance charges of 1.35% of invested assets per year,2 a typical VA of $100,000 would cost $1,350 per year. If a low-cost VA charged as little as 0.25% of invested assets, insurance charges could cost as little as $250 per year. A flat-fee VA charging a fixed rate of $20 per month would cost $240 per year.
Increase the contract size to $1 million and see the savings multiply. The typical VA would cost $13,500. A low-cost VA could charge as little as $2,500. And a flat-fee VA would still cost just $240 per year.
This example doesn't take into account the additional fees that a traditional VA owner might pay each year. Add on asset-based fees for enhanced death benefits or living benefits, service charges, and administrative and transaction fees, and the annual cost to consumers may be significantly more.
In with plenty of growth potential
With low-cost and flat-fee VAs, your clients can save thousands of dollars per contract. When that money goes to your clients instead of to the annuity company, their principal grows faster, earnings potential increases, and deferring gains can help them accumulate more. The benefit of tax-deferred growth is compounded by the fact that many consumers are in a lower tax bracket when they begin to access their savings.
Low-cost or flat-fee VAs are especially beneficial for clients with "tax-inefficient" investments, such as REITs, bonds, and actively managed stock funds that generate short-term capital gains and ordinary income, currently taxed as high as 35%. According to a recent study by William Reichenstein, a finance professor at Baylor University, bond funds and actively managed stock funds consistently perform better in a low-cost tax-deferred VA than in a taxable account.
Now's the time to make your switch
The timing is good for you to begin introducing low-cost VAs to customers. Roughly 76 million baby boomers are nearing retirement. Their pension plans are vanishing and the future of Social Security seems questionable. At the same time, costs for everything from medical care to housing continue to rise. Boomers need more options.
The average long-term investor comes out ahead with a low-cost or flat-fee VA. If every American who owns a traditional variable annuity exchanged it for a low-cost or flat-fee VA, they could take back a sizeable chunk of that $15 billion in annual insurance fees and put the savings back into principal, where it belongs, benefitting from greater growth potential.
Low-cost variable annuities should be a part of every American's portfolio. It's time to get back to the basics of what variable annuities should have been all along: simple, low-cost, tax-deferral products that let consumers save substantially more for retirement, in addition to their IRA or Section 401(k) plan, and help them secure a retirement income stream.
Laurence P. Greenberg is president and CEO of Jefferson National Life. Mr. Greenberg led Jefferson National's transition from a traditional variable annuity company to a recognized innovator of the first flat insurance fee variable annuity designed expressly for the growing fee-based advisory model. His previous positions include first vice president of consumer banking at Merrill Lynch and chief operating officer of Telebank, now E*TRADE Bank.
1Based on $1.2 trillion in variable assets according to NAVA and Morningstar quarterly data reported as of Dec. 31, 2005, and average insurance charges of 1.35% of assets per year based on Morningstar data as of the same date.
