Guarantees in Mutual Funds
Tamiko Toland
Managing Director, Retirement Income Consulting
Strategic Insight
ttoland@sionline.com
Guarantees in Mutual Funds
• Principal protected products flatlined in mid-aughts (c. 2006)
• In the VA space, guaranteed living benefits were booming during this
time
• Investment-oriented players (mutual funds, managed accounts) looking
for ways to tap into the income guarantee trend
• In 2006, first standalone living benefit (SALB), aka contingent deferred
annuity (CDA) conceived
• First products approved in early 2008
What is an SALB?
• Guarantee associated with non-annuity assets
– Individual MF
– Managed account (managed portfolio, UMA, etc.)
• Contingent deferred ANNUITY contract
– A form of fixed annuity (the guarantee itself is fixed)
– No contract value; pays only under a contractual contingency
• Filed with the SEC and states
– Like a VA, requires securities and insurance licenses to sell
• Guarantees analagous to GLWB on VA
– Could also be applied to different product designs
• Not embraced in all jurisdictions
– Not allowed in NYS (must be changed legislatively)
– Under review by NAIC’s A committee
• American Academy of Actuaries authored a white paper
VA vs. SALB
VA
• Tax deferral
• Within VA (penalty for early
withdrawal, etc)
• Separate account structure,
generally able to change asset mix
• Some contracts offer no
commission, CDSC option
SALB
• Taxed on gains
• Directly owned assets
• Limited investment options; if
options exist, tax and fee
consequences for reallocation
• Guarantee divisible in divorce
• Separate account structures offer
no commission, CDSC; varies with
MF
• No death benefit (lower capital
cost)
• Policyholder behavior uncertainty
Different, not Cheaper
• Common argument that SALB is cheaper than a VA
• Reality is that the managed account version is suited to
the practice of many fee-only advisors
• Guarantees are typically less rich than guarantees on
mainstream VAs
• Pound for pound, guarantee is more expensive on SALB
• Insurer does not have explicit asset-based fee income
stream to cushion the cost of supporting guarantees
• Takeaway: innovation is creating income guarantee
products that suit how different advisors do business
Are SALBs a failed product?
• Victim of unfortunate timing
• First issuers:
–
–
–
–
Phoenix
Allstate
Genworth
Nationwide
• Early filers (no approved products):
– Allianz
– Transamerica (on Merrill Lynch Life paper)
Individual MF vs. Managed Account
• Individual MF structure
associates guarantee with
funds/share classes specifically
tailored for guarantee
– Operationally more difficult
because communications
pipelines for MFs are
extremely well established,
streamlined, with no
accommodation for
information about guarantees
– Distribution focused on middle
market, various possible share
class structures
• Managed account structure
associates guarantee with
managed portfolio or UMA
– Managed account operations
are generally messier, so not
as onerous to add guarantee
pipeline
– Relationship with
distribution/asset manager of
managed portfolio is critical
– Products cannot be easily
translated onto different
platforms
– Distribution focused on feebased and fee-only advisors,
many of whom do not have
necessary licensing
The Post-Crisis Wave
• Great-West Life
– 401(k)-based product introduced in early 2011
– Internal distribution, sits as an investment option on its own
platform
– Expanded to create very simple one-fund product for bank
distribution
– Developed VA to mirror SALB
• Transamerica/Aria: RetireOne
– SALB 2.0
– Open allocation similar to common investment restriction model
in VAs allows access to wide variety of MFs within stated
guardrails
– Distribution model includes third party sale of guarantee to
obviate need for advisors to get proper licensing
The Future of SALBs
• Another product within the growing portfolio of
guaranteed income solutions
• Not fundamentally competitive with VA
• Targets different markets from VA
• Less capital intensive but greater policyholder risk
• Resolution of regulatory issues will open the market
• What is insurer capacity for the general class of
equity/longevity risk?
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