Variable annuities are becoming more prevalent within tax-deferred retirement plans, several insurers say.
Fred Conley, the president of Genworth Financial Inc.'s institutional retirement income group, said companies that have scuttled their defined benefit plans to cut benefit costs are turning to variable annuities as a way to make the switch easier for their employees.
"A lot of these firms are thinking that variable annuities may be a nice way for them to transition out of a defined benefit plan and offer something in a defined contribution plan that gives employees a guarantee," he said.
Last year Genworth, of Richmond, Va., started offering ClearCourse, one of the few variable annuities designed for use within a 401(k) plan. Paychex Inc., a Rochester, N.Y., benefits outsourcer, selected ClearCourse as a new investment option for its 401(k) plan earlier this month. It said employees had requested a pension-like product that would offer them guaranteed income in retirement.
Other insurers, including ING U.S. Financial Services, Hartford Financial Services Group Inc., and Sun Life Financial Inc., offer proprietary variable annuities inside or outside of tax-deferred retirement plans.
"Certainly over the last few years, there's been a growing number of premiums coming in to qualified plans, particularly through 401(k) rollovers," said John Harline, senior vice president and head of the financial institutions division at the Atlanta-based ING U.S. an ING Group NV subsidiary.
"There's a great fear among retirees of outliving their money, and variable annuities have really evolved into a great retirement income vehicle - both for future retirement income and current retirement income," Mr. Harline said.
Features that appeal to one investor may not appeal to another. For example, a retiree concerned about estate planning might be primarily interested in the death-benefit feature associated with some variable annuities, Mr. Harline said.
"Understanding these distinct circumstances and needs helps bank representatives determine variable annuity suitability and the best direction for each retiree," he said.
The National Association for Variable Annuities said 42% of the 1,000 financial advisers it surveyed last quarter sold variable annuities within tax-deferred retirement plans. The group published the survey results this month.
But selling variable annuities for use within qualified retirement plans presents compliance issues for banks and brokers. Customers should be informed that investing in a variable annuity with a 401(k) or IRA does not enhance the tax deferrals they receive as investors in those retirement plans, said Scott Sanderson, vice president of marketing and strategic relationships for The Hartford.
"They need to be made aware that they're not receiving another tax deferral for the annuity on top of what they're already getting in an IRA," Mr. Sanderson said.
Mr. Conley said it's important that investors "understand they're selecting the annuity for income feature or another benefit, but not for the tax benefits."
Mary Fay, a vice president at Sun Life and the Toronto company' general manager of annuities, said bankers should disclose the costs and features associated with the variable annuity and ensure the product meets the individual investor's unique financial needs and circumstances.
