Variable annuity providers are still trying to outdo one another's latest innovations, even though the stampede of bells and whistles has left some advisers and investors scratching their heads.
"It's like an arm's race," said Moshe A. Milevsky, the executive director at the Individual Finance and Insurance Decisions Centre, a Toronto research firm.
This scramble to innovate is occurring partly because it is becoming harder to compete on the basis of performance, so companies have to differentiate themselves with features, he said.
Providers began attaching guaranteed minimum withdrawal benefits to their variable annuities about six years ago. In 2002 Hartford Financial Services Group Inc. introduced the Principal First benefit. Other riders followed, including those introduced by Axa Equitable Life Insurance Co. in 2004 and by Fidelity Investments in October.
Most recently, this month AIG SunAmerica Retirement Markets Inc. introduced its guaranteed minimum withdrawal benefit, MarketLock Income Plus.
Investors who buy annuities with such riders also end up paying additional fees, boosting the provider's revenue.
Of the $128.4 billion of variable annuities sold last year, 91% had a guaranteed living benefit available, according to the research firm Limra International. And investors bought $98.8 billion of annuities with such a rider attached, Limra said.
If an investor puts, say, $100,000 in a variable annuity with a benefit that guarantees 5% for 20 years, the investor would get $5,000 annually, even if the market declines — excluding the fees that go along with the annuity.
Rob Scheinerman, senior vice president of product management for AIG SunAmerica, said that since his unit of American International Group Inc. started beta testing its guaranteed minimum withdrawal benefit in May, around a quarter of those who bought annuity contracts from the company took the new feature.
The interest in guaranteed minimum withdrawal benefits likely will continue to ramp up in the coming months, Mr. Scheinerman said. "Our goal is not just to go to our intermediaries and say 'Here's another copycat of something else you have,' but to say 'Here's a need your clients have that we can help you address.' "
Each guaranteed minimum withdrawal benefit in the market has distinct features, including the period covered. For example, AIG SunAmerica's benefit lasts for up to 15 years, while Fidelity's lasts for the investor's lifetime.
Joan Bloom, a senior vice president at Fidelity, would not give figures for the sales of her company's rider, but she said its performance has exceeded the expectations they had when it was launched.
Most companies spend between $5 million and $15 million to develop each product they build, she said. "We're trying to really make sure that we're not playing the game" of launching products simply to keep up with competitors "or getting too complicated ourselves," Ms. Bloom said. "Sometimes that can be a little hard."
When a new product comes to market every month, there is some competitive pressure to follow suit, she said, but Fidelity is focusing instead on the features that provide economic value to its customers.
Axa dropped its earlier guaranteed minimum withdrawal benefit annuity in 2005, when it came out with a product that provides a guarantee for life.
"This is the difference between us and our competitors," said Michael McCarthy, senior vice president for the financial institution channel of Axa Distributors LLC, the wholesale distribution organization of Axa Equitable. "We don't just offer a withdrawal benefit for life. We offer several," but most other companies in the business offer only one or two.
Axa is "nimble" about tweaking and enhancing its products, updating them two or three times a year, he said.
While some companies continue to introduce annuities with attractive riders, analysts say it is not clear that customers are impressed with the "keeping up the Joneses" strategy.
Matthew Tuttle, the president of Tuttle Wealth Management LLC in Stamford, Conn., said he thinks guaranteed minimum withdrawal benefits are too complicated. He does not pitch annuities that contain the rider, and he has even persuaded some investors that they should avoid such products.
"I don't think it's a bad benefit," Mr. Tuttle said. "I just would rather see them lower the commission and make it simpler."
Companies that provide such complicated products are doing so simply because everybody else is, he said.
Mr. Scheinerman said he does not know what the financial planners AIG SunAmerica uses to sell its products would say if his company decided not to change its product lineup for a certain period.
Investors will continue to look at different ways of securing income for their retirement years, he said, and AIG SunAmerica is conducting research and development on different riders for new products right now.
There is some trade-off between an annuity's value and its simplicity, Mr. Scheinerman said. "We're going to minimize complexity to make them as transparent and as easy to understand as possible."
