In the first three quarters of 2019, sales of fixed-indexed annuities (FIAs) jumped 13% from a year earlier, as measured by the LIMRA Secure Retirement Institute. And many annuity watchers say they’re on track for continued growth in 2020.
“There’s an increased awareness and knowledge of the value FIAs can provide,” said Tad Fifer, vice president and head of fixed annuity and RIA distribution at Lincoln Financial Distributors in Radnor, Pa.
That value, simply put, is downside protection with upside potential. Pegged to the performance of a market index such as the S&P 500, FIAs typically have a floor and a cap; that is, if the index drops you only lose so much, and if it rises you gain a percentage of the increase. So they are generally safe, reliable assets. In addition, many offer a lifetime income guarantee.
“After the downturn of 2008, everybody fled to safety,” noted Chuck DiVencenzo, president and CEO of the Washington, D.C.-based National Association for Fixed Annuities. Many haven’t forgotten that lesson in market volatility, he continued—especially those who are thinking about retirement. “They are at a stage when they’re less concerned about accumulation and no longer have the stomach for market risk,” he said. “Therefore, a product that’s able to give them some upside but also protects them on the downside becomes especially attractive.”
Another factor in FIAs’ current popularity: low interest rates. “FIAs can be used as fixed-income alternatives—i.e., their crediting rates are based on the changes in one or more market indexes, not long-term interest rates,” said Frank O’Connor, vice president of research at the Insured Retirement Institute in Washington, D.C. “As such, they do not carry interest rate risk,” he said, referring to the fact that when interest rates rise bond prices fall.
Two legislative events are also impacting FIAs. First, regulatory constraints loosened up when the Trump administration canceled the Obama-era Department of Labor (DOL) fiduciary standards for certain types of assets, including FIAs. Second, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is expected to pass soon, will make it easier for 401(k) plan sponsors to include annuities as an option.
Though the DOL standard is no longer in force, many annuity providers had already changed their distribution system from commission-based to fee-based sales. This has enabled more registered investment advisors (RIAs) to recommend them to clients. “RIAs have historically shied away from annuities, in large part because commissioned products do not fit well in their investment and compensation structures,” said O’Connor. “The introduction of more fee-based products, and just as importantly fee-based products that can be relatively seamlessly transacted on the platforms RIAs use to manage their clients’ portfolios, should drive growth in the RIA channel.”
Lincoln’s Fifer agreed. “We are seeing more varieties of financial planners incorporate annuities as part of their practice and into their planning toolkit, since these products are now available in a non-commissionable format,” he said. “Many fee-only advisors who haven’t historically included insurance strategies of any type are now turning to these solutions. The advent of fee-based insurance strategies has opened up this entire solution set.”
Overall, the primary driver is demand. “The products themselves have gotten significantly more attractive as the market demanded improvements,” said DiVencenzo, citing new FIAs that track a variety of indexes beyond the S&P 500. They’re “designed to “satisfy different requirements for different clients.”
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