For Every Need, An Annuity

A VA for Rollovers

MetLife is not alone in availing its VA customers of exchange-traded funds. A new entrant to the ETF market is Cincinnati-based Western & Southern Financial Group. In January, two member companies of the carrier, Integrity Life Insurance Company (Cincinnati) and National Integrity Life Insurance Company (Goshen, New York), unveiled VAROOM or Variable Annuity for Roll Over Only Money. As the name makes explicit, the VA is strictly an IRA for tax-qualified rollovers; the vehicle is thus targeted to job changers and retirees.

The product offers investors and access to 19 subaccount options (18 individual ETFs and a money market portfolio) from iShares (BlackRock Inc.), San Francisco; and The Vanguard Group Inc., Valley Forge, Pa. But unlike MetLife's fund-of-funds approach, the Western & Southern product lets investors select individual ETF subaccounts representing a broad range of equity, fixed income, international and alternative asset classes.

Mark Caner, president of Western & Southern Financial Group Distributors, the Western & Southern Financial Group division that is rolling out the new solution, says the direct investment approach yields a cost advantage. Depending on the guarantees selected, management fees will range from 0.09% to 0.50%.

"Our product with a basic living benefit option has an average expense of 15 basis points; and if you do a self-style allocation, the average is about 21 basis points," says Caner. "Our approach is much less expensive than a fund of funds or traditional mutual fund allocation. Over time, the cost difference can really add up."

No doubt. But observers, including Daniel Hayes, head of funds management for Radnor, Pa.-based Lincoln Financial Group, note the additional basis points paid on a fund of funds may be worth the extra cost for investors who prefer to delegate the selection and oversight of their ETFs to a professional money manager.

Hayes says Lincoln offers professionally managed fund of funds (including an SSgA Global Tactical Allocation Fund of ETFs), that employ tactical asset allocation and sport a range of investments options inside several of the company's VAs. In addition to various commodities, the alternatives include Treasury inflation-protected securities, real estate investment trusts, variable insurance trusts and floating rate funds that invest in, among other things, investment-grade corporate bonds.

The last, says Del Campbell, a variable annuity business leader at Lincoln Financial, has been well received because of the fund's consistent returns and low volatility.

"We felt that most people invested in a fixed income portfolio would benefit by being well diversified across the global income marketplace," he says. "So the floating rate fund blends together the selections of both aggressive and conservative money managers. The product has been incredibly successful."

A DC Plan with Lifetime Income

While Western & Southern is targeting the rollover market for 401(k)s, 403(b)s and SEP plans, an unusual partnership of three life insurers and the New York-based investment management firm Alliance Bernstein is bringing the benefits of VAs to the plans themselves. The catch: There's no actual VA. The product is a target date fund–a mutual fund that resets the portfolio's asset mix according to a selected time frame–that automatically invests in the GLWB. The insurance provides plans participants with a guaranteed lifetime income stream and access to their account balances at all times.

Why this approach? Seth Masters, a senior vice president and head of defined contribution and blend strategies at Alliance Bernstein, says this strategy addresses the concerns of individuals who want the assurance of a lifetime income, but are averse to giving up control of money to secure the guarantee.

"With Secure Retirement Strategies, we've engineered an insurance product that people are willing to live with," says Masters. "The product makes the target date fund carrying a GLWB guarantee the default option inside the DC plan. The beauty of this pairing is that the amount of lifetime income can increase in good markets, but not decline in poor markets."

Plan participants might also be pleased to learn, adds Masters, that the GLWB is multi-insured. Three insurers now back the product: AXA Equitable, Lincoln Financial Group, and Nationwide Financial. Others may be invited to participate in a future iteration depending on plan sponsor needs.

Whatever the number, the companies will be competing against one another for a share of employee contributions to the GLWB plan benefit. If, say, company "A" is prepared during a given quarter to offer a higher payout or crediting rate than companies "B" and "C," then company "A" will enjoy a higher proportion of the business. Should company "B" offer best payout rate in the next quarter, it will get the most business.

"Our view is that competition is a good thing–not just for plan participants and sponsors, but also for the insurers," says Masters. "If a carrier's balance sheet is exposed to a lot of GLWB risk at the end of year one, then in year two the insurer can simply reduce the payout rate a notch. So the insurer can gracefully adjust capacity so as not to disrupt the business model."