The Art of Annuitization

The art of annuitization. How do advisors and their clients determine how much to annuitize? Ask 20 advisors randomly and I guarantee you will see an incredible range of responses. If recent research and advisor feedback are believed, annuitization remains a mysterious art.

One example – research recently completed by Mathew Greenwald Research provides insight into advisors’ views about using annuity products.

The advisor concern stems from a persistence of an all or nothing view of annuities’ role in financial planning. The research discusses a more moderate approach, targeting 20-30% allocation to annuities.

But why 20-30%? This feels like the 60/40 asset allocation approach that is the default lacking good client data. What this research shows is the lack of a rigorous method for advisors to get annuity allocation advice and be able to compare and explain options unique for each unique client.

Due Diligence & Annuity Advice

Big debate continues in the defined contribution industry about the need to add annuities to DC plans. There are still many issues with annuities in DC plans – Portability, counter party risk, cost, and advisor support to name a few. Here is an article highlighting latest discussions.

Key issue noted in the article is how the annuity option is communicated to the participant:

[As one executive in attendance noted] “We don’t give them (plan participants) the framework to make good decisions; we make it complex.” Mr. Iwry noted that, in that situation, the annuity is already part of the benefits picture, but in many other situations employees often feel like they face an all-or-nothing situation: Take the lump sum or take distributions of the benefit.

Advisors Frustrated with Retirement Income Planning Tools

Sounds like advisors are frustrated as retirement income planning needs grow, while they are equipped with confusing applications and reports for their clients.

More from LIMRA, this time discussing the demand from advisors for help in planning for clients using guaranteed income products.

Fifty-six percent of advisors surveyed in September and October of last year said they expect retirement income planning to increase within the next year. In addition, advisors who participated in focus groups in February of this year say there is greater emphasis on financial planning as more of their clients are nearing or entering retirement. Spurred by the economic downturn, clients fear they will not have enough money to last throughout their lifetime and are requesting retirement income planning.

Participants Face a Huge Gap in Guaranteed Income Product Education

80% of participants want a lifetime income stream but only 20% are planning to use them. This points to a significant gap in education, a need for advisors to communicate better with the potential annuity clients who want the result but don’t understand the product.

Retirement plan participants need more information about strategies for making retirement assets last, LIMRA told federal regulators.

LIMRA, Windsor, Conn., discussed its views on lifetime income education in a response to an income planning request for information issued by the U.S. Treasury Department and the U.S. Labor Department.

Federal regulators asked for advice about use of annuitization and other mechanisms for converting retirement savings into lifetime income streams.