Jonathan Forsgren:

Hello and welcome to this Asset TV Annuities Masterclass. We'll be discussing some of the key features of annuities risks to watch out for when planning for retirement, updates to regulations that incentivize annuity owners and how annuities can strengthen fixed income allocations and retirement portfolios.

Our expert panelists today are Jared Nepa, Vice President and National Sales Manager at Lincoln Financial Distributors, Nick Arndt, Director of Transamerica Advanced Markets for Transamerica, and Steve Parrish, Co-Director of the Retirement Income Center at the American College of Financial services.

Thank you all for joining us. Nick, could you start us off with a quick overview of what annuities are and how they can fit into a client's portfolio?

Nick Arndt:

Yeah, I'd love to that. And I wanted to start by saying thank you for inviting me to speak today. When I hear the word annuity, about six different thoughts come to mind and I'm sure that may be similar for other financial professionals. And the reason is there are many different types of annuities. So there are literally different meanings depending on what type of annuity you're discussing. So I think it'd be beneficial to lay some groundwork on the different types and I'll describe where they may fit in a client's portfolio. The annuity itself has been around since the Roman Empire with the annua or annual stipend, and that's most closely related to today's single premium immediate annuity. And this is a form of income annuity where assets are turned into a guaranteed stream of payments back to that investor, which will last for either a number of years or for a life or a joint life or possibly a combination of those.

Deferred income annuities or DIAs are another example of an income annuity where you're purchasing income at a discount in advance of when you'll need it. And I'm not sure if these are the types of annuities that come to mind when someone says annuity because you're reducing your assets by handing your money over to the insurance company for a contractual guarantee of an income stream. Now these income annuities could be viewed as fitting in a conservative investor's portfolio who's comfortable with giving up control of their assets and when income generation is necessary.

The other category of annuities would fall under what I would consider growth annuities, or I might call them deferred annuities. This category varies widely and could be considered alternatives to someone's bond portfolio or alternatives to their equity portfolio depending on the type. So examples of fixed income type of deferred annuities might be a fixed annuity offering, an interest rate of return, a multi-year guaranteed annuity or a MYGA, or a fixed indexed annuity versus an equity type would be something more like a variable annuity that allows investors to grow or possibly decline with market fluctuations.

And as these products have evolved over time, while more and more have come into existence, in fact the most recent type I would put in the growth category, but also offer some protection are called registered index-linked annuities or RILAs, sometimes referred to as buffer annuities. So there's a lot of different types of annuities, and every company has their own variation of each type, which could offer various additional benefits that can be added to certain annuities to help cover certain client goals possibly such as a nursing home or a long-term care riders, income guarantee riders, and enhanced death benefits. And depending on the ultimate client need, there is the right annuity fit out there. I like to use the analogy of finding the right tool for the job. Yes, I could use the handle end of a screwdriver as a hammer, but it would not be as efficient or effective as just using an actual hammer.

Jonathan Forsgren:

Well thanks for that Nick. Jared, I'm coming to you next. With continued unknowns around where the US economy could land, how can you bring value to financial professionals and investors with a suite of protection first products?

Jared Nepa:

Yeah, it's a great question Jonathan. Thank you very much. Thanks for the opportunity to be part of this. So there certainly is plenty of uncertainty in regards to where the US economy is going. I think we're hearing a lot of different news playing out in the media today whether we'll find ourselves in a hard landing, a soft landing, or no landing at all. What we do know is, as Nick mentioned earlier, there is a wide amount of options available in the annuity space and each of those annuities are built designed by our product manufacturers to meet the needs of different goals that investors are setting. So couple things I'll say about this is as we carriers or distributors, for lack of better terms, are bringing products to market, we want to have a two to two-prong approach.

One, be able to provide a wide breadth of options to meet as many needs as possible. And two, make sure that those areas are playing in [inaudible] lines of where clients are seeing value today. So what I can tell you is there's times [inaudible] certain matter what annuity you looking at or using, the idea of having some protection is going to give an advisor and a client more a appetite to take on some risk, whether that be eliminating some risk in their account value protection, eliminating some longevity risk with an income type guarantee. It's things of that nature is I think going out and doing your research and finding out which annuity for the right place is important, but regardless, it's about protection. If protection is involved in your investment strategy, it's going to make you a heck a lot better easing your way into the market. So that's one piece of it from a product perspective.

But I do think there's another side of this right now in regards to the other part of your question about providing value to financial professionals. At Lincoln, we work really hard outside of product, but also bring some additional resources to help advisors educate their clients about what's going on in the markets and then tying that conversation into how you can use products like annuities to help enter the market in times of turmoil and do it with a sense of calm, so to speak. So I'll speak of three things particularly that we offer financial professionals today as an additional resource outside of product to help provide value.

Number one, we've launched our Market Intel Exchange resource, which is basically an amalgamation of multiple different asset manager views on the market. We publish it on a monthly basis and updated monthly. Financial professionals can subscribe to this and get it delivered to them on a monthly basis. And we break it down to general themes in the marketplace, whether it's equities, fixed income, asset allocation, particular topics like the Fed and interest rates. It's a very timely resource. So that's number one.

Number two, on a quarterly basis we're continually putting out information from our Chief Investment Officer, Jayson Bronchetti, called Perspectives from our CIO, you'll see those on LinkedIn, you'll see those available on our website as a resource for advisor to get timely information and why protection products could help them have better outcomes with their clients.

And then lastly is we have a complete comprehensive website called the Interact with Impact website. This is all practice management information, has nothing to do with our products so to speak, but it has everything to do with helping financial professionals grow their practice. And again, if we could offer protection solutions to help you grow your practice, that's a benefit. But this website's been fantastic. It's called Interact with Impact, allows financial professionals to go on. And there's everything from improving your virtual background to referral tactics to helping clients from an attitude and mindset perspective through mental coaching. So those are the things at Lincoln that we think about, not only just protection providing value, but what are other things that we can help advisors grow their business to provide value outside of product as well.

Jonathan Forsgren:

Nick, is it a good time for our clients to invest in annuities? And if so, why?

Nick Arndt:

Yeah, this is a great question to address we're humans, we're emotional beings and having behavioral aspects that we need to consider, nobody wants to have buyer's remorse. So to answer the question plainly, I think it is a good time because if we look at where we are today in the annuity market in relation to where we were just a year or two ago, I'd say today is a more advantageous time than in the recent past because interest rates have risen, that means that the rate of returns offered on those fixed deferred annuity types are going to be higher than they were a year ago. And many companies are going to offer more enriched features and benefits on their growth type of deferred annuities like variable annuities and those RILAs. Now, I can't foresee what's going to happen in the future, but since we did see both bonds and stocks perform poorly last year, annuities may help clients have some peace of mind and a portion of their assets today.

Jonathan Forsgren:

Jared, we've been talking about how annuities are doing now and how they're well positioned now and compared to two, three years ago, but how has the annuity landscape changed over the last 10 years, and what should investors know about today's industry landscape?

Jared Nepa:

Yeah, it's funny. The more they've changed, the more they've saved the same is the way I'll start that question. And what I mean by that is, at the core of what an annuity does, it helps with peace of mind in a client's investment portfolio. Again, whether it's protecting account value, protecting a death benefit, or protecting income, that piece of it has not changed over the last 10 years. But taking the core element of annuities aside then the offerings have absolutely changed over the last 10 years. If we think about one of the fastest growing segments in the marketplace today is the registered index-linked variable annuity that did not exist five years ago is the way it as it did today. And I think that's a testament to our industry of going out, soliciting feedback, identifying the investor needs and maybe potential gaps in the planning process for financial professionals and continuously trying to innovate.

So what I will say too is the other thing that stays the same is this business is very resilient. You could see the value proposition of protection, whether again it's income or account value or death benefit, depending on your planning process, the interest rate environment over the last 10 years has been difficult to say the least, I think we got to a point where we were teetering with zero to negative rates. And as insurance companies we're able to withstand long periods of time like that because of the law of large numbers and because of the way our industry is built and put together. And I think it's a testament to what we do for our investors and the staple that we've been in the planning process over the last 10 years, regardless of what the interest rate market has looked like. And I could say, and I know Steve's maybe been in the business longer than I, and same with you Nick, but when we look at the value proposition today and that the interest rate environment we're in today, I don't think the annuity offerings out there have been stronger than they are today than they have been in the last 10 years, regardless of the segment that you're looking at.

Steve Parrish:

Absolutely.

Jonathan Forsgren:

And one change that has happened in the annuity space in the last year is the SECURE 2.0 was passed late last year, and parts of the law included some incentives for guaranteed income vehicles. So Steve, what were those incentives and how have they impacted annuities from a practical standpoint? And have you seen any change in market interest for annuities as a result of SECURE 2.0 passing?

Steve Parrish:

Right. So we have really SECURE and SECURED 2.0 and it's interesting, that's one of the few bipartisan laws that have been passed into six years because Congress recognizes that for retirement, people are not adequately insured, do not have enough. And so, one of the things that's going on is the law said not enough people have defined benefit plans. So you're going to have to do what I call a DIY DB, meaning a do-it-yourself defined benefit plan. Well, they put a lot of provisions in the SECURE Acts to reflect ways to efficiently get a guaranteed lifetime income. But obviously annuities is one of the more useful commercial products that you can buy to provide a guaranteed lifetime income. So a few examples of what was in SECURE 2.0 and SECURE itself to help encourage that is both Jared and Nick referred to RILAs or registered index-linked annuities. Let's come up with a more complicated term.

And what they said is we want to encourage those kind of products so they're making it easier for these insurance companies to file these products. So it's a nod from the head of Congress that this is important. Another example is ETFs. Wouldn't it be nice to have ETFs as part of a variable annuity? They have provisions to encourage and allow that to start happening. And the most obvious one is they're now trying to make it easier for the employer, versus just the consumer to offer annuities as one of the assets that you can use in your 401(k) or your 403(b), as one of the tools because it has a guaranteed lifetime income feature in it.

Jonathan Forsgren:

Can you dig a little bit more into that, about how SECURE 2.0 made it easier to include annuities in that employee sponsored retirement program?

Steve Parrish:

Right. Because wouldn't it be nice if that was one of your choices? But the trouble was is the employers were not offering it because of a concern of liability. What happens if I offer this, I'm the plan sponsor and I offer this and it goes bust? So what happened is with SECURE Act, they basically said, okay, we're going to give you an exemption from liability on that as long as you're not negligent and those kind of things. And so they've made it more attractive for these companies to offer these kinds of products. Now is it working? It really started in around 2018 and we didn't see a lot of activity, but I want to quote from the April 19th Wall Street Journal. So just last week, they had a headline that said Fidelity and State Street Push to Make 401(k)s More Like Pensions. And then they say, "More retirement plans will offer annuity options." So yes, we're starting to see more activity with those kind of things.

Now that doesn't necessarily mean there's going to be a shift. In other words, insurance companies offer life insurance as an example through employers, but you don't see them used as much as what might be bought on the general market. So whether that actually happens, I don't know. But yes, we are seeing more and more employers starting to say, hey, as an investment option in your 401(k), would you be interested in an annuity because it provides a guaranteed lifetime income.

Jonathan Forsgren:

Nick, where can the topic of annuities fit in a planner or advisor's conversations with clients? Or stated a different way, when does the conversation about annuities come up in a client conversation?

Nick Arndt:

Yeah, great question. I think it's naturally three different times a conversation can lead to a discussion around annuities. And one of these times is usually relatively early on in a new client acquisition when that transition from maybe prospect to an actual client happens. And this is typically the time when we get to know the client and their needs and we have to understand their ability and willingness to take on risk. And hopefully that's accomplished through some sort of risk tolerance questionnaire as well as understanding their time horizons. And some clients may understand certain risk factors that they know and can see now, but they fail to look further out to potential future threats to their portfolio or their retirement nest egg. And that's where annuity strategies may help in one instance.

Another time is when we're discussing taxes, tax efficiency, tax diversification, this is a big part of what I do and the team at Transamerica's Advanced Markets. Clients tax concerns are always going to be a topic that financial professionals need to address. And I think we do a great job of discussing diversifying a portfolio from an investment risk standpoint, but we may overlook the importance of tax diversification. I see a lot of value in taking inventory of all clients' assets and identifying if there is a concentration in a certain type of account with a specific tax characteristic. So what do I mean? We look at the three primary tax characteristics an account could fall under as either currently taxable, tax deferred or tax-free. By diversifying assets across these three account types with varying tax characteristics, when we're in a changing tax policy environment, which I think we all would agree and acknowledge we're currently in and probably will be for the foreseeable future, this will help our clients withdraw from the most optimal sources. And annuities are tax-deferred investments, so they can help fill that bucket on that inventory sheet.

And then the third is a two and one or maybe they should be viewed separately. So a third and fourth time is when talking about clients retirement income planning and legacy planning. These may go hand in hand because a client might have aspirations for leaving a legacy, but if those assets are needed for retirement income while they're still alive, well that's obviously going to reduce the amount they can leave to their heirs. And annuities are pretty versatile and some can offer features that help our clients with better outcomes for both retirement income planning and legacy planning.

Jonathan Forsgren:

We're going to move to you Jared. Now you were earlier talking about the impact of inflation on real purchasing power. When we account for inflation, the real purchasing power of cash today sits at around 0.9% compared to the 9.6% for the S&P 500. How can we help investors understand and realize the value of staying invested in the market as a way to reach their long-term goals? And specifically, we look at the spectrum of annuity strategies today. Are there certain products that offer investors considerable advantages in today's high inflationary environment?

Jared Nepa:

Yeah, so let me tackle the second part of the question first. And just to go back to what Nick said, I think he's on to something. And his second point talking about taxes, we spend so much time as financial professionals talking about asset allocation. I think we need to start coaching and educating people more about asset location. Just because you may invest in one fund here, one fund there, may not be the most advantageous to use non-qualified dollars in a certain type of fund. By putting it into the annuity wrapper and benefiting from the tax deferral, you really get some benefits like tax-free transfers, you get tax-deferred growth. There's a numerous benefits and I'm sure Steve can spend a ton of time on and in educating us on, but it's really about asset location as is as important as asset allocation when it comes to a tax perspective.

So to come back to your question, Jonathan, really in regards to specifically in this environment, are there some advantages out there that clients should take a look at? I would certainly point to a couple of things. One, to answer your question specifically in regards to that, the living benefit space certainly benefits in a higher inflation environment. Especially for the variable annuity space. One, for the opportunity to grow your income over time through the variable sub-account performance. But additionally with high inflation, we tend to see higher interest rates as we're seeing today. And when you see higher interest rates, that allows us as an insurance company to take that information in the investment vehicles that we use and pass a lot of that benefit through to the consumer.

And what I'll say is I've been in this business for 17 years and you look at the offerings that we have today, and I'm sure my friends at Transamerica and other competitors as we look across the landscape, the amount of guaranteed income a client can get today comparatively over the last 10 years is higher than it's been since I would say 2009. Again, someone may fact check me on this, but we're done our research here at Lincoln, if you look at a pure guaranteed minimum withdrawal benefit, meaning you get an income for life that does not go down, those rates are among the highest we've seen in 10 years and they're available to a client today. And so we're out there telling that story and the reason they're that way is because we have the ability to take a higher interest rate environment and pass through those benefits to the income strategy that we present to a client.

As far as the first part of your question, can we educate clients on getting into the market? I mean, I think we all agree it's impossible to time the market, but if you really want to benefit from long-term investing, it's time in the market. And if we go back and I can reference a piece from a resource that I spoke about earlier called our Market Intel Exchange. We have a piece on there, it's a source driven from FactSet. Just looking back to 2000, so January 1st, 2000 through December of 2022, the cumulative rate of return in the S&P 500 at that point was 304%. If you simply missed 10 days in the market. So if you're trying to pick your moment, if you missed just 10 days in the market, the cumulative return drops from 304%, down to 85. And if you miss 20 of the best days, it drops from 304 to 9.1. So again, and if you missed 30, the story goes on. The point is, do your research have an opportunity and a conversation with financial professional on that aligns to what your goals are. And I can tell you if you're still nervous about getting into the market, putting in a level of protection, whether for income or account value is available in today's marketplace.

Jonathan Forsgren:

So continuing on the theme of protection. Nick, you mentioned some risks or threats to a client's retirement nest egg. How can annuities address those threats?

Nick Arndt:

Helping clients identify and understand risks in retirement is fundamental to the work that we do as financial professionals. And there are many risks to a retirement income plan and some that may not be as obvious. So as I mentioned earlier, I think clients might overlook some of those future risks that aren't right in front of them, one of them being longevity risk. 70% of individuals will underestimate their life expectancy. Clients need to understand and consider a realistic life expectancy because longevity is not only a risk in itself, it's also a risk multiplier for many of those other threats. So the Social Security Administration estimates that one in 365 year olds today are going to live to 90, and one in seven will live past 95. A married 65-year-old couple today has a 50/50 chance of one of them living beyond 90. This is an area of most importance because the stakes are high.

Imagine a client running out of money at an older age when there are few options and it may be too late to do much about it. In income annuities and deferred annuities with those guaranteed income protection strategies, is great to mitigate longevity risk. And another risk is market risk. The risk of losing portfolio value due to negative market returns. The five years before retirement and the five-year period starting retirement is when retirees can least afford bad market returns because it will have a lasting impact on the success of their retirement income plan.

And this ties right into sequence of returns risk as well. That 10 year period is critical because retiring at the start of a bare market can more rapidly deplete a retirement nest egg and we can help clients create better outcomes so that they can live their best lives in retirement. And the protection feature of some annuities like RILAs can help mitigate both market risk and sequence of return risks while still giving a client's portfolio that opportunity to grow.

And then this leads into inflation risk, which is obviously a top headline concern for many investors right now, because the impact of inflation has on their purchasing power. Certain types of annuities like variable annuities could allow investors to help keep pace or even overcome inflation with increased market performance. There are several more risks I could discuss, but I'll end with one more and that's being health risk. Some studies show this is the number one concern of retirees. Not accounting properly for costs associated with health insurance and health expenses in retirement can be at risk And health view services estimates that a healthy 65-year-old couple today will need $425,000 in today's dollars to cover premiums for Medicare Parts B and D, Medigap, dental and other out-of-pocket expenses. And that's for a healthy couple. Imagine the estimates for a retiree with chronic or acute illnesses.

And so as I mentioned earlier, some of these annuities offer those enhancements that can assist with these unforeseen health issues in retirement like a nursing home or a long-term care rider. Because 70% of 65 year olds today will have a long-term care event in their life. So this is an important planning point that annuities can help address.

Steve Parrish:

And Nick, I would add one other risk and that's the tax risk. So many people think that when they retire they're going to have very low taxes no problem. But the issue is you have all kinds of hidden taxes like the Social Security tax torpedo and the IRMAA tax. And if you haven't heard of those, that's why they're, they're hidden. The nice thing about annuities is it allows you to time when you get some of your income and that allows you to at least mitigate that task risk to an extent because you will be paying taxes in retirement.

Jonathan Forsgren:

Well thanks for that add-on Steve, and I'm going to stay with you Steve, but going to bring it back to something Nick said, I've never thought of longevity as being a financial risk, but here that's what these discussions are for. So Steve, can you tell us what a QLAC or qualified longevity annuity contract is and why might it be good for good fit in retirement planning?

Steve Parrish:

This is a good one for financial advisors to think about. You know those things where the professor's talking about it and no one's buying it? Roth was certainly an example. We've had Roth for 25 years, but it's only really been in the last 10 years that people started saying, wait a minute, this is a good idea. Well this is the good idea in my opinion enough that I've bought one. The idea is you got that longevity risk, you don't know how long you're going to live. Well what if you went to an insurance company and gave them money now let's say in your 60s and said, I want to cover that longevity tale and I'm really worried about 75 and on. So they could quote you with a 100,000 you have now, they might come to you and say, well when you turn 75, we will guarantee that we'll pay you, let's say, $22,000 a year as long as you live. It really helps. Like Social Security, it cuts off that longevity tail.

Now what are the two real strong features of that? Is number one, as I said, it provides a lifetime income, but the other is, it also helps you avoid those hated required minimum distributions. So in other words, if this is just theoretical, but if you took all of your money that's in qualified plans IRAs and put it into a QLAC, instead of having to start taking money out at 73, which is the current RMD, you won't have to take it until that QLAC kicks in at 75 or 80, or the law even allows it as late as 85. It's a really good concept to think about in addition to Social Security to make sure that you'll always have an income you can outlive.

Jonathan Forsgren:

Jared, what role do you see VAs with guaranteed living benefits playing over the next two to five years?

Jared Nepa:

Yeah, so just to dovetail off of what Steve said, I couldn't agree more. I mean there there's opportunities for handling longevity risk and a QLAC C is absolutely one of them. The other areas for living benefits, I think that we've hit a point here over the last several years where that business has been trending downward. We did about, I think the last year's number 2022, we finished around 23 billion, represented about a third of the annuity marketplace. And that these are variable contracts that's to be expected in an environment that we're seeing today. We're seeing fixed indexed in multi-year guarantee annuities growing during times of market turmoil because there's a stated rate of return, it's a great alternative to cash per se.

But I think we're really turning the corner and our friends at LIMRA also agree. I just read an article yesterday that they're projecting this business to grow by almost a third or roughly 30% come 2027. So you scratch your head and think about, whoa, that's a pretty aggressive growth rate over the next four years. Well, when you think logically and you look at the environment today, there's three reasons why I think this makes sense. Number one, is the number of 65 year olds in coming into next year will reach its peak level higher than we've seen in our country at any point in time. So that's number one. The demographics are there and people, to Steve's point, they don't have a pension and they're looking for things to help offset, or I should say, stack on top of the guaranteed income that they could expect from Social Security. So that's number one.

Number two, the competitiveness of the products as I mentioned earlier, have not been this good based on the interest rate environment, at least in my 17-year career here at Lincoln. So the competitive of the product is really a compelling story to meet the needs from any of those who may be at retirement or may be a little bit underfunded for retirement. They benefit from these additional enhanced guarantees. So that's a second option.

And really the third is, as I said it earlier, there's a lack of options in the marketplace today. If you're a 65-year-old investor retiring from your 401(k), you've done a great job accumulating. There's the traditional assets that you've come to know, whether they're target date funds, equities, or fixed income, do not offer the sense of security that a guaranteed lifetime income contract is with an insurance carrier. So whether you're using a QLAC as a planning tool later, whether you're using a fixed annuity with a living benefit, whether you're using a variable annuity for living benefit to keep pace with inflation over time, I think that the lack of options out there are going to have investors really leaning into learning more about these. And that's why you're seeing industry education forums start to come to light. One that comes to mind is the Alliance for Lifetime Income, whose sole purpose is to educate via non-biased third party to educate consumers on the values that annuity provide in the financial planning landscape today.

Jonathan Forsgren:

I'm going to bring it back to you Steve. What's a MYGA? We've touched on it, but what's am MYGA or multi-year guaranteed annuity?

Steve Parrish:

Well, I have good news. We've been talking about a lot of complicated stuff. But MYGA really is a pretty straightforward, easy concept. And actually I saw in one quarter recently it was 40% of annuity sales people get it all. It is what the title says, it's a multi-year guarantee. So it competes nicely with CDs, for example. So you give them the money and they give you this rate guarantee. The three basic reasons they're so popular right now is one, they are highly competitive against some other fixed income things. So for example, you might get as much as a hundred basis points more on a MYGA than you might with a equal duration CD. Second, you got that tax deferral as we were talking about. And that's important as people are in their high income years while they're working, they want to defer the tax till later. And the third is, and it varies from one company to another, but generally, you can access that money earlier if you need to. I mean with the CD, as you know, basically forfeit all of your interest. With a lot of the MYGA structures, they will let you get at some of that money even though it's before the end of the guaranteed period. So that's what it is, pretty straightforward.

Jonathan Forsgren:

Thank you. Nick, you, you've touched on this, but maybe we should dig into it a little bit more. What are some of the main advantages of the tax-deferred nature of an annuity?

Nick Arndt:

Yeah, this goes back to one of those times when a conversation about annuities is relevant. And I've actually created a piece on this topic called Tax Efficiency for Today, Flexibility for Tomorrow, A Tax Control Strategy. And the keyword is control. Yes, tax deferral will allow the assets to grow without the drag of paying taxes each year. And that's one advantage. Actually when doing research for that piece I found by comparing a tax tax-deferred investment to a currently taxable investment over a 25-year investment, that tax-deferred account could grow to almost 50% more in value due to the fact that there isn't an annual tax due on those gains. The other advantages all deal with control. The investor can control when they take distributions, to the extent that they can control that. They can control the amount that they take as a distribution. And that ultimately gives them the control when they pay the taxes on those gains, for instance, on a non-qualified deferred annuity. And this is an advantage for someone who may currently be in a high earning tax bracket, but will fall into a lower tax bracket when they retire, or maybe they're planning to leave some assets to a younger generation who might be in a lower tax bracket when they withdraw the money.

Jonathan Forsgren:

Nick, since qualified accounts like IRAs already have the characteristic of tax deferral, are there any additional advantages to investing these types of account assets in an annuity?

Nick Arndt:

Yeah, this is where a financial professional can show some advanced planning scenarios. And a lot of times our client's largest asset besides their home is going to be their qualified retirement account. They've done a great job of saving through their working years and that nest egg that they've nourished and grown now has to be depleted. And at a certain age, they don't have a choice. And that's because of RMDs. So let's say you can find a guaranteed income benefit with 5%, 6%, 7%, or Transamerica, we even have one that offers 8% guaranteed lifetime withdrawal amount. If the client's RMD is only, let's say four point a half percent, which is that mandatory withdrawal amount at age 78, they're able to satisfy a larger percentage of their required minimum distribution from the annuity while leaving their other IRA investment assets to grow with less distribution drag.

Because the IRS does allow us to aggregate all of our IRAs together to determine that overall RMD amount, this gives the client flexibility on which IRA to satisfy that amount from. And so another strategy that may not be as well known is something that I like to refer to as turning your individual retirement account into a joint retirement account. And this strategy is specific for married couples. You might ask how is this possible because IRAs are individually owned? And the word individual is right in the name of that account. Well, it's possible because some annuities allow for a joint guaranteed lifetime withdrawal benefit. So essentially you're turning an IRA into an income stream that would be guaranteed for two lives, both you and your spouse. So there are possibly still other advantages to investing qualified assets like IRAs in an annuity. Even without considering the advantage of tax deferral.

Jonathan Forsgren:

Steve, Massachusetts became the 30th state to adopt the National Association of Insurance Commissioner's annuity Suitability and Best Interest Standard. What is the NAIC's annuity standard and why is it so popular in three fifths of the states?

Steve Parrish:

Well, partly as with the popularity of annuities also comes the risk that some people abuse it. And there have been some abuses in the sales of annuities, particularly in the area of variable and fixed income annuities or fixed index annuities. And so the National Association of Insurance Commissioners, which essentially is the group that comes up with model laws for each of the states said, we have got the raised bar. And so what they did is they, much like the SEC, they said, look, the people who provide annuities are going to have to sell those annuities in the best interest of the client. Very similar to Reg BI for sale of securities. And as you pointed out now, a huge number of the states have adopted in a very short period of time.

Well, what's good about it? I mean, it's more work I suppose for the advisors, but what's good about it is it adds an extra throat to choke as I like to call it. In other words, not only is the advisor liable if they didn't sell this annuity in the best interest of the client, but now the issuing company is as well. So there's two people watching over to make sure that the appropriate sales practices are being used. And from that standpoint, I think all boats rise with a tide. We're going to see that this better protects the consumer. And so we all benefit from having this kind of a regulation.

Jonathan Forsgren:

Jared, I'm going to engage you next. What are some common misconceptions or concerns that clients may have about annuities, and how can financial professionals help address these?

Jared Nepa:

Yeah, I think I'll go back to some of the comments that Steve made earlier in regards to the NAIC information. I mean, there are a number of annuities out there, both registered annuities, non-registered annuities. I think it's very important that the suitability process goes in place to make sure we're aligning, and financial professionals are correctly aligning the right tool and not using the handle of a screwdriver to pound in and nail. We want to make sure that they're doing their due diligence, that it is a suitable recommendation for that client. So we applaud the suitability process because we think it serves clients well and it lends to better outcomes. So when I think about the common misconceptions, I was thinking about how to simplify this because there's a multitude of different ways you can go, but I talk about the four Cs that may come up with client misconceptions.

So number one, it's control. I think there's a perception out there that you buy in an annuity and it's your grandfather's annuity where you seeded control over to the insurance company and in return you got an income and you didn't really have access to your money. Those options are still out there today, albeit not necessarily being selected as much as other options that offer you full control, as Nick alluded to earlier. So I think that's a misconception. Not every annuity requires you to seed control over to the insurance carrier. In fact, it's the minority, small minority of annuities purchased today that actually have that feature. So that's number one.

Number two, it's commissions. I'm expecting an advisor to get paid a whole big amount of commissions. Frankly, that's not the case. There's multiple different commission options, particularly in the registered space where we sell through broker dealer communities. There's levelized compensation, so there's no choice versus one company versus another. So I think that commissions certainly come up and there are things out there with high commissions, but that lends to the third C, which is commitment. Typically the higher commitment, the higher commission. And what we find is we're not going to offer a strategy out there for a client who needs liquidity in year two to be held up for a seven-year surrender period or a 10-year surrender period. So making sure that you do your due diligence on the level of commitment in that contract is extraordinarily important.

And then lastly, it all boils down to cost. Cost is a very important concept today. If you look at every investor out there, you look at the emergence of ETFs, it's become a cost play. And what I would challenge advisors to do at this point is head on that misconception right away. For every cost there is a benefit. And if you can't find the benefit, then clearly it's not worth paying the cost. So I think the best way that we've coach advisors to do that, Maslansky + Partners did a fantastic study in conjunction with the Alliance for Lifetime income in regards to how to address costs with clients and addressing the costs exactly what they are and the value those costs provides, meaning what's the value proposition in return the client gets for paying those costs, and then be very clear and transparent on explaining what those costs are. This is for a death benefit, this is for lifetime income you can outlive, this cost goes to my advisor compensation. And if you lay those out and are very transparent, I think that will educate investors number one, and give them a little bit more empowerment to understand on whether or not the value is worth the trade-off in the cost.

Jonathan Forsgren:

Nick, Jared just went over what end users or clients should look out for when considering annuities. Can you say, what should wealth planners or wealth advisors look out for when considering annuities or considering whether to work with them?

Nick Arndt:

Yeah, and some of that does dovetail into what Jared just mentioned there. There's a lot to think about and consider when recommending an annuity purchase. First and foremost, each annuity investment needs to be looked at specifically for each client's needs and goals. There's no one size fits most or all in these products. In fact, as we heard earlier with regulations, financial professionals should know the products they're selling and make any appropriate disclosures necessary to the client ahead of that sale. Now that being said, there are some landmines that can catch investors off guard even when proper disclosures and suitability requirements are covered. Because these products allow tax deferral, the IRS views them as a buy and holder, a long-term investment. And one aspect of this to pay close attention to for non-qualified annuities is the tax ramification of distributions and possible penalties, because deferred annuities distribute gains first and are taxed that the owner ordinary income tax rates. So any gains that are distributed before the owner turns 59 and a half has a 10% additional federal tax on them, just like early withdrawals from IRAs.

Another consideration I would say in regards to regulations is, what licenses are required to actually sell a specific annuity and what trainings also may be required? I've seen that this catches financial professionals off guard sometimes not knowing that a specific product training for the annuity that they're recommending is required and that can delay the sale. Another important consideration is the amount of assets that are being recommended for and in annuity. I would say it is probably not a prudent recommendation to have all of a client's assets in an annuity. There is a limit that should be considered with these products.

Now, on a more positive note of things to consider are the vast variations in annuity types and products offered between annuity providers. This is almost a full-time job to have someone on your team to keep up with all the different solutions that are being offered today. There's a lot of flexibility and versatility with these products. If there's a better solution available today than what a client is currently holding, a tax-free 1035 exchange or a qualified transfer could be considered if that will put the client in a better position for a greater outcome.

And then one last thing I'll mention that I see time and time again being glanced over, is the way these assets pass after the owner dies. Annuities pass by contract law. And that allows the owner to designate a beneficiary. So these assets do not have to go through probate, but just having a primary beneficiary designated it's not enough and financial professionals must encourage every single one of their clients to also name a contingent beneficiary.

I can't tell you the number of cases I've worked on over the last two years where either one, the beneficiary died before the owner and then the owner dies with no beneficiary named or the owner and the beneficiary died at the same time. In both of these scenarios, the annuity, being a non-probate asset, is going to be forced through probate because there wasn't a contingent beneficiary listed for that asset to be distributed to. And this ties into the client's overall estate plan. Make sure that all facets of that estate plan correlate and follow the client's wishes.

Jonathan Forsgren:

Steve, we've talked about how the current market environment has really pushed a lot of interests in annuities, but as markets stabilize, as we know it's cyclical. And hopefully that's sooner rather than later, but we'll see. Do you think the interest in demand for annuities will stay on?

Steve Parrish:

Good question. I mean, just before the filming of this, we heard from LIMRA that annuity sales have been 47%, a 47% gain from a year to year standpoint. Is that sustainable? Probably not. However, I would say there are not a lot of headwinds facing that industry and a lot of good tailwinds. So you're still going to see some growth. But I think what'll happen is, let's say that we have a calming down of equity markets and they go back to normal and let's say inflation gets tackled and interest rates go down, well that means that probably MYGA sales for example, they may slow down or even go lowered simply because interest rates aren't as high. But then you'd have variable sales going up because people are interested in the market. So it may offset itself somewhat.

The encouraging thing I think that's going on is we now have almost a stamp of approval from Congress with those SECURE Act provisions. I talked about admitting that annuities are needed because people have to do their own defined benefit because they're not going to get one from the employer. And so annuities will continue to be popular. So even if they're not selling as big as they are right now from an investment standpoint, I think it's been locked in with a consumer's mind that wait a minute, annuities can provide a lifetime income. And that's something I'm interested in.

Jonathan Forsgren:

Jared, I'm going to come to you next. Why should advisors consider using protection products in their practice?

Jared Nepa:

Yeah, and I just want to dovetail off of what Steve said. I think what he said was something important. The annuity landscape has evolved over the last 10 years. We know that there's cyclicality in market cycles and interest rate cycles, and you want to be able, as a financial professional to have and work with carriers that provide a broad depth of solutions. So one thing we pride ourselves here at Lincoln on is having a well diversified product portfolio. So when we're in certain environments, we want to be able to pivot there. And then when the market swing back to where variable maybe more in vogue that we want to be able to be a consistent player there as well.

But to answer your question, Jonathan, it's all around client satisfaction. I'm going to give you some information here that was done by two different studies. One was done by Lincoln, a consumer survey, and then other through the Alliance for Lifetime income. If we talk to financial professionals every day, I don't know somebody out there who's not trying to grow their business. So how do you grow your business? You do it two ways. You either grow your assets or you grow your client base. Well, you can control the growth of your assets to an extent, but we know that that can go up and down. So the safer bet is to ensure that you're growing your client base. How do you grow your client base? You offer them strategies that improve their overall experience and drive greater satisfaction.

So I'll give you two stats. Number one, those who work with a financial professional have a higher satisfaction rate than those who don't. The tune of 75%, okay? So that's three quarters of people who are working financial professional feel better about their situation. So for what our RFPs do every day, it's extremely important. But that number jumps to 86% when a financial professional discusses an annuity with their client. So the client satisfaction rate goes up from 75% to 86% in regards to their level of satisfaction. And when we drive a little bit deeper in looking at consumers, according to Alliance for Lifetime income, who own an annuity or a pension, [inaudible] their savings will last lifetime [inaudible] who own it, is at a 70% level. Those who don't, it's at 30%. Think about that for a minute. That's a huge disparity. For those who own an annuity or pension versus those who don't, to be able to just fund their basic needs in retirement. For those who own it, 86% [inaudible] versus 57% for those who don't.

So at the end of the day, if we're trying to grow our practice and we're trying to help financial professional, we think that, again, outside of market appreciation, offering protection in a client's portfolio or at a bare minimum, having the conversation, educating a client about protection products is going to increase their overall satisfaction, increase their experience of working with that financial professional, and ultimately, hopefully drive more referrals into that financial professional's practice.

Jonathan Forsgren:

And Nick, earlier you spoke about discussing annuities with clients in regard to retirement income planning. Can you describe in more detail how annuities can be implemented in a retirement income plan?

Nick Arndt:

Certainly. Well, from an academic standpoint, which I know Steve is very familiar with, there are typically three approaches to solving that retirement income puzzle. The most widely known, but maybe not the most effectively implemented would be some sort of systematic withdrawal approach. And an annuity can assist in this approach by creating an income stream that the client cannot outlive and will allow that financial professional more flexibility with planning with other buckets of assets.

The second approach is the bucket approach or identifying phases in retirement to build different portfolio investment strategies varying by the different time horizons. So typically we'll see fixed income assets with greater security being used for earlier retirements and higher volatility investments with greater growth potential for some of those later retirement expenses. So annuities of differing types can be used throughout the bucketing strategy, using a fixed deferred or even an income annuity for that first bucket. I've heard financial professionals really like the protection feature and growth potential of RILAs for that second bucket and maybe look at variable deferred type annuities for that last bucket.

And then the third approach, I think fits hand in glove with an annuity solution. And that is the essential versus discretionary spending approach. Determining a client's essential expenses in retirement and making sure that amount is covered by all sources of guaranteed income will provide them better outcomes. And annuity can help create that floor of guaranteed lifetime income to cover those essential expenses. So as we heard earlier about the changes in the annuity landscape over the years, one additional change that's really helped the planning aspect when using annuities is that a lot of the planning software we use has now incorporated the option to include annuity investments in the planning.

And I'll leave everyone with one last retirement plan consideration to think about. We know as we sit here today that the [inaudible] Social Security pass our full retirement age allows our benefit amount to grow at 8% until age 70. And the latest trustee report has indicated starting in 2034, the available amount in that trust fund will not be fished to cover 100% of those benefits that are needed to be paid out. So that to me sounds like a planning opportunity for everybody who is discussing retirement income planning. Maybe there's a way to implement an annuity strategy with a portion of a client's asset to help bridge the delay period from full retirement age to age 70 in order to allow that benefit to grow to that maximum amount possible. And if in 10 years that benefit amount will be reduced because that trust fund is limited, then clients have that peace of mind that they have created other sources of guaranteed income.

Jonathan Forsgren:

Well, Jared, Nick, Steve, thank you very much for joining us today and sharing your expertise.

Steve Parrish:

[inaudible].

Nick Arndt:

Thanks, Jonathan.

Steve Parrish:

Thank you.

Jared Nepa:

Thank you.

Jonathan Forsgren:

And to our viewers, thanks for watching. For Asset TV, I'm Jonathan Forsgren. We'll see you next time.