Investment managers are developing lower-cost alternatives to annuities to help customers — and advisers — spend their savings after retirement.
Fidelity Investments and Vanguard Group have both rolled out products designed to manage retirement savings and parcel them out in monthly increments, and Brinker Capital is working on one.
Advisers have focused on asset accumulation for decades, and executives and analysts said that shifting their attention to products geared toward spending will help them retain clients after they retire.
"Annuities are good products, but some clients just don't like them," said Noreen Beaman, a principal at Brinker Capital. "Advisers need an alternative if they want to retain customers and assets."
Analysts said retirement income planning remains a hot topic, but the focus has been squarely on annuities, despite their drawbacks. Fixed annuities lock up principal and do not offset inflation; the costs associated with variable annuities usually exceed those of mutual funds, and monthly payouts can be meager.
"There has got to be a better strategy for investors than annuities," said Michael White, who heads the research firm Michael White Associates. "The guarantees that annuities offer and the different features have proven insufficient, improper and expensive. There needs to be an alternative that can properly facilitate distribution while protecting principal better."
Kenneth Kehrer, the research director at Kehrer-Limra in Princeton, N.J., said that these new products will appeal to a certain segment of investors but that conservative bank investors will continue to invest in annuities and certificates of deposit. "My sense is, in the bank channel, guarantees are king, and that is why annuities will continue to really sell in banks," he said.
Fidelity began offering 11 income replacement funds in 2007. Vanguard introduced three managed payout funds in May 2008. The funds use three-year averages to make distributions that are paid monthly. The funds have collected about $320 million in assets, according to John Ameriks, a principal at Vanguard.
Though these products do not offer the guarantees of annuities, Ameriks said the payout funds are attractive to investors because they are less expensive than the typical annuity, which costs 100 basis points, compared with a payout fund, which costs 60 basis points. "The biggest advantages are its flexibility and liquidity," he said. "With an investment solution, you have more options if you want to get out. That wouldn't be the case with an insurance product where there are stiff surrender charges."
Beaman said Brinker, of Berwyn, Pa., is developing products that will provide customers with "paychecks" from their retirement savings. The company said Tuesday it expects to introduce its personalized distribution strategy, which gives clients a cash liquidity reserve and an investment portfolio, by the end of the quarter. The cash liquidity reserve consists of 18 months of cash, from which the client can begin drawing immediately.
As the cash balance is reduced, Brinker sweeps in cash from investments in dividend- and income-producing funds. A stop-loss of six months of cash will be maintained so, regardless of market conditions, the cash reserve will be replenished. "We want to help people to get their money that they have saved throughout their life to work for them in retirement," she said. "Most advisers have spent their lives thinking about accumulation, not distribution. We need to turn the tables now."
Beaman said many advisers are providing similar services, "but it is difficult because they are doing a lot of it on the back of an envelope. We want to provide the tools so they can provide it in a more systematized way."
Still, few are abandoning annuities. Fidelity offers a variable annuity, and Beaman said advisers can use Brinker's product with an annuity. "These are nice products to blend with an annuity," she said. "They can offer a nice five- to 10-year stopgap prior to using an annuity."
White said the industry still has a long way to go. He said advisers focused on asset accumulation could lose customers. "Financial services companies need to educate and train advisers about the role they need to play as customers head toward retirement," he said. "Sales reps have to become more consultative than transactional. It is hard to be transactional when you have a 67-year-old client that needs these assets to live on. Companies have to be willing to change their approach."