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The Elusive Benefits of “Lite” Annuities

Longevity-protected solutions are affected by the focus on lower investment fees (i.e., annuities). This article will discuss why annuities with lower explicit fees are reasonable but are worthy of analysis and careful consideration. Lite annuities have features that make them seem more appealing (like lower explicit fees). However, the elimination or reduction of certain features, whose benefits are often complicated and challenging to model (like step-up provisions in GLWBs), can significantly lower the expected income of the strategy – and may provide the false impression that it will protect your income for life. Lite annuities are essentially a middle ground between investments that aren’t annuities and more traditional annuity strategies. Their expected income is likely much lower than other products with better benefits, and they don’t offer much more than a pure unprotected strategy. Fees are essential to consider when buying any product or investment. However, financial advisors, plan sponsors, and retirees should be cautious with solutions that protect against outliving your income (but potentially lower fees). They are less likely to offer real protection in the long run.

Fees

More attention has been paid to investment costs in the asset management industry, especially in the defined contribution (DC) space. For example, according to the Morningstar 2022 Target-Date Landscape Report, the asset-weighted expense ratios for target-date funds, which are the most popular default investment in DC plans, have gone down from 67 basis points (bps) in 2009 to 34 bps in 2021. This focus on low fees spreads to other areas, like longevity-protected solutions (like annuities), where products with lower explicit fees have been introduced. These strategies are made to appeal to investors who care about fees.

The Issue with Lite Annuities

The problem with lite annuities is that they only really help the investor or annuitant if the main annuity’s primary purpose is to protect against longevity risk, which is not met. Yes, lower fees may result in a higher residual balance that goes to an heir (for example, if the annuitant dies early in retirement). However, if this happens, the person likely would have had more money (possibly a lot more) if they hadn’t annuitized in the first place.
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I have worked with Deloitte Partners, Directors and Principals for approximately 30 years, saving them considerable amounts of money on their Group Term Life Insurance Premiums. We have also addressed Long Term Care within Life Insurance and Fixed Index Annuities. The Annuities Guarantee fixed interest rates and Long Term Care doubling. Protected from any corrections in the stock market. Great for retirement planning.

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