From the early 2000s until the financial crisis hit, the major variable annuity issuers were locked into something of a death spiral of product development: As interest in income guarantees grew, increasingly aggressive strategies were developed to capture more sales and market share, culminating in product designs that inflicted serious damage to balance sheets when both the equity and bond markets dropped precipitously.

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Capture share they did, with sales peaking at $180 billion in 2007, compared with $124 billion in 2009. Benefit base increase rates of 6% or higher, 5% withdrawal rates at all ages, aggressive portfolio allocation requirements (or no requirements at all), hedging programs that ignored basis risk (such as the risk that the hedged vehicle's performance is substantially different from the hedge instrument, typically a broad index) and no management of volatility were the hallmarks of the benefits that swelled liabilities and capital requirements and nearly brought down more than one company.



Fast-forward five years and some decidedly different trends are emerging. Sales have recovered somewhat, reaching $154 billion in 2011, and the issuers are back in the lab. The industry has been bifurcating, with new product manufacture and marketing either going back to basics with lower cost, tax deferral and investment-oriented products, or focusing on the development of simplified guaranteed-income products.

Among the newer offerings, Schwab Retirement Income, launched August 1 and underwritten by Pacific Life, has no guaranteed death benefit and an optional single or joint lifetime withdrawal benefit. Only three funds are offered: the Schwab Balanced, Balanced with Growth and Growth funds; these are funds of ETFs with annual fee ratios of 0.8% each. Combined with 0.6% mortality and expense fees as well as administrative costs, and 0.8% for a single lifetime withdrawal benefit (1% for the joint version), the total cost is 2.2% (2.4% for joint) versus the industry average of 3.75%.

On the back-to-basics side - but with a twist - is Jackson National's Elite Access product, launched in March. The B-share has a 1.00% combined mortality and expense and administrative charge. It offers no death or living benefit guarantees; rather, its focus is on tax deferral and a broad array of investment options, including alternative asset classes. It is positioned as a tool to help advisors create efficient portfolios for their clients, as well as to make alternatives easier to use by incorporating them into precooked portfolios.

Two other examples of the back-to-basics trend are Sammons Retirement Solutions Inc. LiveWell VA and Symetra Tru VA. Both offer no loads and an extensive range of investment options, but LiveWell VA offers a guaranteed death benefit and comes at a higher cost, 2.65%, versus 1.32% (including average fund expenses) for Tru. Neither offers an income benefit.

Great West launched the Smart Track product in February for TD Ameritrade's platform. Smart Track offers an extensive fund lineup, ultralow cost at a mere 0.25% in mortality and expense and administrative charges, average total fund expenses of 1.01%, and optional single or joint lifetime income benefits for an additional 1% (the joint version has a lower withdrawal percentage). Only amounts allocated to the Maxim SecureFoundation Balanced L fund, with a total expense ratio of 0.94%, are covered by the guarantee, so the all-in cost for the income guarantee in Smart Track is 2.19% - the same territory as the new Pacific Life product on Schwab's platform.



Frank O'Connor is product manager for annuity data at Morningstar.

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