Articles following the posting of the Department of Labor’s (DOL) fiduciary regulations suggest that those regulations could be the death knell for variable annuities. But they were followed with an article by Steve Saxon, partner in the Groom Law Group (posted in Plan Sponsor magazine on June 21, 2016) asserting that is not the case.
As we look at the limited investments permitted in 403(b) plans, we turn to the Spectrum Group’s asset data for 403(b) plans at the end of 2014. According to Spectrum, there was $1,085 billion in 403(b) assets with $464 billion in fixed annuities, $361 in variable annuities and $260 in custodial mutual funds. Clearly, variable annuities are an important option for the many participants who hold them.
According the Steve Saxon, variable annuities have important features desired by a large number of 403(b) participants — including “death benefits that may be selected by participants in 403(b) plans, or IRAs that provide that, if the participant or IRA holder dies before....payments have begun, the beneficiary is guaranteed to receive a specified amount......which will be at or near the purchase payments made........” For participants wishing “to avoid dramatic losses in retirement income due to a market downturn” the ability to select guaranteed options such as “the guaranteed minimum accumulation benefit (GMAB) which provides that the value of the annuity will not fall below the principal investment amount regardless of the performance of the underlying investment” is vital. Similarly, Saxon points out, “the guaranteed withdrawal benefit (GMWB) and the guaranteed minimum income benefit (GMIB)” provides guarantees sought by participants who, because of those guarantees, will stay invested in the stock market, known to increase the chances of accumulating enough wealth for a comfortable retirement.
While there will be challenges (in particular with the complexity of the BIC contract exemption in the DOL regulations), the insurance industry will meet those challenges so that variable annuities will remain as an important investment choice in 403(b) plans and IRAs.
Stay tuned — and, remember that the variable annuity and the dodo bird have nothing in common — one is extinct; the other will thrive.
Ellie Lowder, TGPC, Consultant, is a member of the NTSA Communications Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.