It’s no secret—401(k) advisors aren’t exactly annuity fans.
But new research from a very reputable source might have them thinking twice, and with fixed indexed annuities in particular.
As a rollover option at retirement (and there was even talk of including FIAs inside the plan), Roger Ibbotson finds they control equity market risk, mitigate longevity risk and, importantly, have the potential to outperform bonds in the near future.
He recently analyzed the potential of using FIAs as an alternative to bonds in retirement portfolios, and suggests that bond returns “in today’s historically low-interest-rate environment may be insufficient in meeting the anticipated retirement needs of U.S. investors, potentially placing many at risk of outliving their retirement savings.”
“What financial advisors should acknowledge is the immense impact that shifting market conditions, longer life expectancies, and uncertainties surrounding the future of Social Security have made on our U.S. economy,” Ibbotson said in a statement. “In recent years, we recognized the potential of these conditions to result in a perfect storm where investors may be left with insufficient funds to carry them through retirement.”
“Conventional wisdom has most investors de-risking their portfolios by allocating more heavily to bonds as they approach retirement,” he added. “However, investors should consider other alternatives such as FIAs. In this low-interest rate environment, complacency can be a danger to our clients’ futures.”
The researchers, in collaboration with Annexus, utilized S&P 500 Index dynamic participation rates to simulate FIA performance over the past 90 years and presented the results in similar fashion to Ibbotson’s iconic “Stock, Bonds, Bills, and Inflation” (SBBI) chart.
The subsequent data, which considered historical volatility, interest rates, and dividend rates, indicated:
- Uncapped FIAs would have outperformed bonds on an annualized basis for the past 90 years.
- It is highly unlikely bond investors will realize as high a return from capital gains in the coming 10 years as they have realized in the past 10 years. In fact, if rates rise, capital gains in the future will be negative (capital losses).
- Uncapped FIAs offer a more tailored risk profile than bonds, capturing a portion of the growth offered by large-cap stocks, while lowering overall market risk.
More detailed findings, as well as a full methodology, can be found in the Ibbotson and Zebra Capital Management whitepaper “Fixed Indexed Annuities: Consider the Alternative.”
“The evolution of the industry has made these vehicles more flexible and attractive than ever with the emergence of uncapped product designs and Smart Beta indices,” Don Dady, co-founder of Annexus, concluded. “In today’s fiduciary environment, it is imperative that advisors know what products are available and best suited to address the needs of their clients.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.