Fidelity Investments has become the latest financial services provider to launch a simplified, low-cost variable annuity product in an effort to attract customers, including bank clients, who are baffled by many annuities' complexities.
After loading annuities with extensive menus of benefits - such as principal protection and death benefit guarantees - and investment choices, some providers are making them more straightforward, and less costly, in order to appeal to customers alienated by the increasingly sophisticated products, analysts said.
Boston-based Fidelity's two new variable products, the Fidelity Personal Retirement Annuity and the Fidelity Freedom Lifetime Income Annuity, have transparent fees and simplified underlying investments.
Fidelity decided to develop these products after consulting its retail customers through focus groups and other research, said Jon Skillman, the president of Fidelity Investments Life Insurance Co., a Boston-based insurance subsidiary of the mutual fund giant.
Competitors ING and Nationwide also have offered simplified variable annuities recently.
"For both of these products, we've really tried to demystify annuities," Mr. Skillman said. "Many investors are confused by annuities. We wanted to offer annuities that are simple, basic, and easy to understand, with costs that are fully transparent to investors."
The transparency of fees on the new products sets them apart from similar ones offered by rival providers, he said. No sales or maintenance fees are charged, nor are investors charged for terminating the annuity contract. The Securities and Exchange Commission has been pressuring investment product providers to make their offerings more transparent to retail customers.
Because these annuities do not include features such as guarantees against investment losses in a market downturn or built-in death benefits, they are significantly less expensive than the industry average for variable annuities.
The Fidelity Personal Retirement Annuity, which builds savings on a tax-deferred basis, has an annual charge of 0.25% of the value of the annuity, and this is 82% lower than the industry average of 1.41%, according to Morningstar, the Chicago investment research firm.
The Freedom Lifetime Income annuity has an annual charge of 0.60%, or 46% less than the industry average of 1.12%, Morningstar said.
The annuities also offer simplified underlying investment options that are automatically allocated based on the investor's risk tolerance so that investors do not need to worry about diversifying. The prediversified portfolios are automatically rebalanced to maintain the chosen asset allocation.
Fidelity expects demand for the new products to be strong as investors approaching retirement look for a simple, low-cost way to generate a steady stream of retirement income, Mr. Skillman said.
The Social Security Administration has predicted that more than 60% of baby boomers' retirement income will have to come from personal savings rather than Social Security or company-funded pensions. The new Fidelity annuities are designed to help investors supplement traditional retirement savings vehicles such as 401(k)s and IRAs, according to Mr. Skillman.
Fidelity plans to market the annuities directly to retail investors and via its network of 2,800 registered investment advisers.
Analysts including Kenneth Kehrer, the president of the Kenneth Kehrer Associates consulting firm in Princeton, N.J., have forecast significant demand for such clear-cut variable annuities.
Such products may be particularly appropriate for banks, whose salespeople generally focus on selling traditional banking services rather than investment products, Mr. Kehrer has said. With this bias, bank sales representatives may have difficulty mastering the complex features typically associated with variable annuities.
Fidelity's new annuities come on the heels of a similar product introduced in late August by the Atlanta-based U.S. subsidiary of Amsterdam's ING Group NV.
ING's Simplicity Variable Annuity is similar to Fidelity's new annuity offerings in that it offers investors and advisers four preallocated fund of funds options from which to choose. The funds have built-in diversification and upside potential tailored to the investor's risk tolerance.
Nationwide Financial Services Inc. in Columbus, Ohio, also has a similar product, the Best of America ElitePro Classic. But it has a built-in death benefit, minimum income guarantee, and underlying Gartmore asset-allocation funds.
