Fidelity International Challenges Value of Living Benefits
June 8, 2008
A new report from Fidelity International, the global investing arm of the Boston-based fund giant, questions whether the benefits of deferred variable annuity income guarantees justify the fees.
The report, called “The Nature of Financial Risk in Retirement: Are Guarantees the Answer?” estimates only a one-in-70 chance that a typical lifetime withdrawal guarantee would pay out more than it cost.
Deferred VA lifetime withdraw options generally provide annual payments equal to 4.5% to 7% (depending on the owner’s age or the number of people covered) of a guaranteed income base until the contract owner(s) dies, even if his account zeroes out before then. Any unpaid balance after the owner(s) dies goes to the beneficiary.
Fidelity estimated that the cost of a variable annuity with a 50/50 balanced portfolio and a GLWB would average 250 basis points, including insurance, distribution, and asset management costs. With an all-equity portfolio, the average charge was estimated at 350 basis points.
“Even using simple interest, a charge of around 3.5% would erode more than half of the original capital over 15 years,” the report stated. Fidelity Investments, the parent of Fidelity International, offers a much lower-cost variable annuity with a lifetime income guarantee direct to retirement investors.
These findings contrast with arguments made by variable annuity manufacturers that, in giving contract owners enough confidence to invest in equities during retirement, the lifetime withdrawal guarantees introduce enough upside potential to justify their costs.
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