Issue link: https://resources.envestnet.com/i/1527488
Annuities as an Asset Class for Fee-Based Advisors l 48 © Envestnet 2022 More broadly, in the context of the retirement income plan, focusing on the internal costs of a variable annuity is not the best way to frame the problem we are attempting to solve. Is an investments-only strategy with lower internal fees preferable if that approach to managing longevity and sequence risk translates to spending less or delaying retirement? That is the context in which to assess fees: can they support better outcomes through risk pooling that reduce the overall costs of the plan in terms of the asset base required to meet the financial goals of retirement? There is also another aspect of variable annuities related to asset allocation. If one maintains the same asset allocation both inside and outside of the variable annuity, then the additional fees for a variable annuity can be expected to deplete the underlying value of the assets more quickly than if they were held in an unprotected investment account with lower fees. However, this outcome changes since an income guarantee can support using a higher stock allocation within a variable annuity. In this case, when markets do well in retirement, the additional exposure to the risk premium can more than offset the higher costs of the variable annuity to allow for greater overall growth in assets. This can support greater legacy after meeting the same spending goal. If markets perform poorly in retirement, the additional costs within the variable annuity could cause depletion of assets sooner than otherwise. But with poor returns, the investments-only portfolio will be on track to depletion shortly thereafter. With the variable annuity assets, at least, the income guarantee continues to support spending after the contract value depletes. With investments- only, spending power ends. The simple argument that higher fees makes annuities unattractive is not the whole story. If one maintains the same asset allocation both inside and outside of the variable annuity, then the additional fees for a variable annuity can be expected to deplete the underlying value of the assets more quickly than if they were held in an unprotected investment account with lower fees. © Envestnet 2022