Wither the three-legged stool? The pension plans that represent one leg of the venerable retirement income model are going the way of the $2 bill, while Social Security, another leg of the stool, is wobbly at best. It's no wonder, then, that the buzz in the annuity world is about optional features that guarantee a lifetime income stream–living benefit riders.
Here's a look at two more of the most intriguing developments on the annuity rider front:
- Moderating fees. Variable annuities and their riders are widely viewed by the investing public as "gas guzzlers," says Mark Caner because their fees make them expensive to operate. Caner says his company, Western & Southern Financial Group, and others are out to change that perception with lower-fee annuities and riders. Case in point: Western & Southern's VAROOM, which stands for Variable Annuity for Roll Over Only Money. Its living benefit riders cost in the range of 60 to 80 basis points, and fees are calculated based on account value rather than benefit base, making them even less expensive, according to Caner.
- More age-banded living benefits. Five years ago, recalls John McCarthy, product manager of annuity solutions at Morningstar, Inc., the majority of GMWBs offered a static withdrawal percentage (5 percent was a popular number) to apply throughout the contract-holder's withdrawal period. Nowadays, he says, perhaps two-thirds or more of GMWBs offer age-based payout bands. "Age-banding is a trend that has made these benefits a lot more flexible. They also allow carriers to much more precisely calculate what they are going to owe" to contract-holders over the duration of the guarantee.
What will annuity riders look like a year or two from now? What new directions will living benefits take? Given the lively competition among insurance company product development wonks to come up with the Next Big Thing in the annuity market, be sure to stay tuned.
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