Americans are always looking for quick fixes. They want simple and easy solution to all of their problems. Overweight? Just go on a fad diet. Unhappy? Read a self-help book. Not getting enough done? Manage your time on a smartphone.
We also see this yearning for simplicity in people's financial decisions, especially regarding retirement. Consumers are looking for strategies and products that are easy to comprehend and execute, but that also deliver guaranteed outcomes.
But the complexity of life often defeats simplicity. Sometimes the only way to address tough problems (i.e., creating a guaranteed lifetime income in a time of uncertainty) is to apply robust solutions -- those with great inherent flexibility.
As retirement planners, we are at a crossroads today. Advisors are clamoring for simpler product designs. Yet, they also know that simplicity has a cost: Less flexibility to address client needs.
Still, it's hard to deny that simplicity has great allure. In fact, in a recent LIMRA study, a majority of financial advisors said that guaranteed income products are too complicated and that they'd welcome more education and support from their wholesalers.1
Many VA carriers, for their part, rolled out simpler offerings in order to de-risk their portfolios after the 2008 credit freeze. According to a recent survey from the Insured Retirement Institute (IRI), nearly two-thirds of insurers surveyed said they either offer simplified annuities now or plan to do so in the coming 12-18 months.2
But what works for advisors and for insurance companies may not work so well for clients who face the daunting challenge of planning for a secure retirement.
From where I sit, here's what clients in the retirement red zone, the crucial years before and after retirement, are looking for in terms of retirement solutions:
o A retirement income they can't outlive.
o Access to benefits without annuitizing.
o Participation in any market growth.
o The ability to adjust their annuity as current needs change.
The ability to retain some control over their investments even after they begin pulling out income.
All of these preferences are important, but the first one -- guaranteed income -- is crucial. Another recent IRI study found that more than 81% of variable annuity purchasers chose to protect themselves with an optional lifetime income guarantee in the first quarter of 2010.3
Guarantees continue to be the elephant in the room when it comes to variable annuity sales. It's not hard to see why. Investors understandably fear retiring in a down market and potentially outliving their assets. They want a monthly check they can count on. Guaranteed income, available through robust variable annuities with optional income guarantees, encourages clients to stay invested in equities, while insulating them against market downturns that reduce their retirement income.
So here's the question: Do simplified variable annuities respond to the client needs just discussed? It's hard to give a definitive answer because simplified product designs vary. However, I will say that, in general, many of the new offerings may fall short of what consumers are looking for today. Some of them may typically:
o Eliminate or scale back the living benefit guarantees.
o Reduce the frequency of step-ups in the protected account value.
o Mandate automatic income payments at a certain point (for example, on the fifth contract anniversary).
o Reduce the number of investment options offered.
o Place more emphasis on passive rather than active investment strategies.
If your goal is to respond to client retirement-income needs -- to deliver real value -- then product designs with such limitations may not hit the mark. They also may have suitability implications, since they provide fewer options for targeting client needs.
When looking at investment options, a similar scenario exists. You may want to look for a carrier that offers an investment platform with a range of options that suit your clients' risk tolerance and preferences. Here are some specific features that distinguish a robust investment platform from the simpler designs many carriers have adopted of late:
Active management: There's nothing wrong with indexing. But if your clients need active management to feel comfortable investing, wouldn't you prefer to meet their needs? Plus, the ability to offer active management has become the hallmark of a financially strong carrier -- and a strong differentiator between competitors in the marketplace. In addition, active management may be needed to help generate potential upside growth for your clients.
Choice: Rather than settle for fewer choices, look for variable annuities that offer more than ample choices to cover the vast majority of client needs. Specifically, you want to be able to choose from among portfolios that offer:
o Traditional strategies (based on longer-term views of capital markets)
o Tactical strategies (based on shorter-term views)
o Quantitative strategies (based on disciplined, quantitative approaches to portfolio management)
o Alternative strategies (based on traditional and non-traditional investments that can be less correlated to the market).
Flexibility: Similarly, look for a carrier that offers a wide array of turnkey asset allocation portfolios that deliver diversification based on your client's goals, risk tolerance, and investment time horizon. The portfolios should also offer rebalancing to ensure that your clients' portfolio tracks their investment goals over changing economic times. But you should also have the flexibility to combine asset allocation portfolios to address specific client needs.
Now, I admit that robustness creates greater complexity and higher fees. But the solution is not to eliminate robustness; it's to find simpler ways to explain the product's benefits. Also important: explaining what people get for their fees. When you consider the total package of benefits variable annuities provide -- guaranteed retirement income, investment growth, and a death benefit -- higher fees actually make a lot of sense.
At the end of the day, striving for simplicity is a wonderful goal in retirement planning. But if it comes at the expense of the tools we need to really help our clients, the quick fix will already be broken.
Donald L. Mallavia, CLU, CMFC, is Vice President, National Sales Manager, Agency Channel for Prudential Financial. He has been a Prudential Financial service professional for more than 21 years and has earned numerous awards, including Wholesaler of the Year three times (2001, 2003 and 2004), and the President's Citation Award twice (1993 and 1994).
All guarantees, including optional benefits, do not apply to the underlying investment options and are backed by the claims-paying ability of the issuing insurance company. Optional benefits have certain investment, holding period, liquidity, and withdrawal limitations and restrictions. The benefit fees are in addition to fees and charges associated with the basic annuity.
For agent use only.
Footnotes:
1. "Financial Advisors Say Guaranteed Income Products Too Complicated--Want More 'Explainable' Products for Their Clients," LIMRA International, retrieved July 21, 2010, http://www.limra.com/newscenter/newsarchive/archivedetails.aspx?prid=128
2. "Annuities Projected to Have Strong Growth Potential," Insured Retirement Institute, retrieved July 21, 2010, http://www.irionline.org/advisors/article/id/389
3. "Annuity Sales Reveal Consumer Preferences," Insured Retirement Institute, retrieved July 21, 2010, http://www.irionline.org/advisors/article/id/392
