For all the strides banks and other financial firms have made in gathering the assets of baby boomers, the threat looms that once customers reach retirement age their assets will head out the door.
One product touted as a way keep them in-house is the payout annuity. Though even proponents acknowledge that it is a complicated pitch, they predict the annuities will be an important tool for retaining the assets of not-quite-wealthy customers.
Payout annuities, also known as immediate annuities, provide a guaranteed stream of income, unlike a deferred annuity, which is a long-term investment. Once a payout annuity is bought - for a one-time fee that can be derived from a lump sum 401(k) distribution, for example - the purchaser receives a regular monthly payment for the rest of his or her life.
John Fenton, a principal in the annuities practice of Tillinghast-Towers Perrin, an Atlanta consulting firm, said that so far no major banks have made a big push to sell payout annuities, the overwhelming majority of which are sold by nonbanks.
"The big drawback of this product is that nobody understands it," Mr. Fenton said. Banks, many of which are relatively new players in annuities, generally push less complex products, such as deferred annuities, he said.
Any bank that manages retirement investments should also sell payout annuities, and the ideal time to pitch them is when retirees must withdraw lump sum distributions from 401(k)s and individual retirement accounts, he said.
Bradley Powell, the president of the institutional marketing group of Jackson National Life Insurance Co. in Atlanta, said his company has sold $950 million of insurance products through banks this year, but only $12 million of payout annuities.
However, that $12 million is 20% more than last year, Mr. Powell said. "The time is coming for this."
Though no banks have developed large-scale programs to push payout annuities, experienced bank representatives are recognizing the annuities' advantages and incorporating the products into the portfolios of individual clients, he said.
Phillip Polkinghorn, the president of Keyport Life Insurance Co. of Boston, a top seller of insurance products through banks, said they are well positioned to sell these annuities.
One reason is that banks tend to hold a lot of IRA funds, Mr. Polkinghorn said Another is that customers who buy other annuities through banks tend to be older than those who buy them from nonbanks, he said. "Banks have some of the prime candidates for this concept as customers."
Sales of payout annuities could rise from this year's expected total of $2.4 billion to $19 billion by 2003, Tillinghast-Towers Perrin says. The firm says such demographic trends as an aging population, earlier retirements, and steadily lengthening life expectancies foretell a much larger market, Another factor: Funds in accumulation investments such as mutual funds and 401(k)s have grown dramatically.
"Certainly the need is there," said Bruce Abrams, the president of American General Annuity. His company will sell about $4 billion of annuities through banks this year, but only $3 million or $4 million will be payout annuities, he said.
One major factor hindering sales growth is that consumers cannot withdraw all the money at once for something like a medical emergency, Mr. Abrams said. Still, he predicted that bank sales would grow as the market matures, because banks have middle-market consumers who are the target for this product.
Mr. Fenton said the payout annuity is not for everyone. Rich people who are looking to pass money along to their heirs would not benefit from the annuities, but retirees looking to live on their savings are prime candidates, he said.
