SPIA on steroids, Pt. 3Article added by Joe Bellersen on March 16, 2010
Joseph Bellersen

Joe Bellersen

Joined: August 21, 2010


The Department of the Treasury, Internal Revenue Service issued 26 CFR Part 1, RIN 1545-BJ04 and Department of Labor, Employee Benefits Security Administration issued 29 CFR Parts 2509, 2520 and 2550.RIN 1210-AB33 . You can access the RFI document at: http://www.gpo.gov/fdsys/pkg/FR-2010-02-02/html/2010-2028.htm

Based upon the questions, we believe that there continues to be a broad misunderstanding about the benefits of an immediate annuity, whether from a defined benefit (DB) or defined contribution (DC) plan, or from personal IRA accounts or other assets dedicated to retirement income planning. We reviewed some client DB files and found annuity conversion rates to be astonishingly generous. Annuity conversion values implied an IRR of 8.34 percent. Some cash balance or hybrid plans credited guaranteed interest until normal retirement at more than 5 percent per year. Yet about 95 percent of participants elected lump-sum distributions when the plans terminated during the market mayhem of 2008. There is no reason at all to believe that these results would differ during better financial times.

The result

In theory, the market is saying that even during the "Great Recession," a guaranteed accumulation rate of 5 percent and a guaranteed annuity conversion IRR of 8.34 percent as of age 65 isn't worthwhile. My question is: Compared to what? Clearly the value of annuities is not appreciated.

The problem

From the actuarial community, it's all about the need for actuarial understanding. The academic community attempted to shed light on the rationale for this behavior. Messrs. John Chalmers and Jonathan Reuter recently concluded that lump-sum distributions are preferred because:
    1) Retirees perhaps do not appreciate the value of annuities
    2) Participants demand liquidity even in this circumstance1
The flaw

I think that Chalmers and Reuter nailed it; however, I've been saying the same thing for more than 20 years. The academic community is only now beginning to wrestle with the issue. My conclusions come from years of real world and every day experiences. We think that the financial services community will resist embracing immediate annuity plans for one simple reason: It's in the advisors interests to do so. We think that the general public may be more inclined to appreciate immediate annuities if they can be measured in a tangible way. We believe this due to our experience. That's why The Bellersen Curve ®2 was designed as the ideal tool to get the story straight -- no oxymoron intended.

See "Annuity Payoffs," Joseph B. Bellersen, Jr., ProducersWeb, May 3, 2006

The pitch

We have seen the constant "swing for the fence" mentality since our involvement with DB plan terminations began more than 30 years ago. Recently, I realized that there is absolutely no disclosure required when forfeiting a lifetime income immediate annuity from a plan. As more retirees seek solutions, legislative efforts will continue either in rule making or tax incentives in order to sway consumer sentiment to embrace annuitization. This will occur in spite of resistance by financial advisors, planners, and brokers. In QAS' responses to the above RFI, we recommend adopting a disclosure when a lump sum is offered from a DC plan. This is only a beginning. While the word "annuitization" has never been foreign to QAS, it has been foreign to most advisors. Clients are nearly unanimous, and easily persuaded to take the lump sum with the wisdom of this argument or pitch: "You always do better in the market."

The truth

There is no incentive (read "compensation") to advise that an immediate annuity from a DB plan be taken. I realize this may cause a firestorm, but I don't care. We believe that advisor negativity is self-serving, and objectivity is a behavioral trait which is severely tainted for obvious reasons:
    1) ERISA created IRA Rollover accounts to provide pension portability

    2) Plan sponsors took the next step and amended their plans to allow for lump-sums at a time when interest rates were very high and it was financially advantageous to do so

    3) Equity return performance fanned the fire about always doing better in the market (learned about "hasty generalizations" some time ago)

    4) Financial advisors implemented plans to scour the earth for those nearing retirement with the bold print facts about "past performance," noting in the fine print that it "is no indication of..."(you know the rest)

    5) Retail broker compensation is based largely upon assets under management, so when immediate annuities are sold, asset under management decline

    6) Registered investment advisors are usually paid entirely on assets under management (some exceptions for fixed fee only)

    7) Commissions on immediate annuity plans are 1X

    8) Commissions and fees = $0 when advising to take a plan based immediate annuity ("What's in it for me?" for the advisor is the primary need -- not objectivity)

In the mind of the advisor, it's a lose/lose proposition with all downside. I rest my case. But before you light up my e-mail or phone, ask these questions:
    1) How much compensation does an advisor earn when they recommend a plan based immediate annuity be taken?

    2) Do advisors understand the difference between a life annuity and a life annuity certain?

    3) Do advisors know the difference between a Joint and Survivor and Joint and Last Survivor?

    4) Do advisors compute the value of a plan based immediate annuity before recommending it be forfeited?

    5) If so, what mortality table and interest rate assumptions are used?

    6) Do advisors compute the economic value of pension deferral?

    7) Do advisors evaluate client health before recommending that they forfeit a potentially generous life time immediate annuity income from a plan?

    8) How do advisors disclose the difference between the value of a plan based immediate annuity versus your recommended plan?

It is clear that the RFI is focused on the retirement security interest of retirees with its proposed default annuity provision. Of secondary interest should be the need to provide legacy accounts for beneficiaries. This has historically been a function of life insurance.


More focus should be placed upon retirement income security and not asset risk-taking as individuals reach retirement. As we enter this new decade, we are also wary that the U. S. Treasury debt is mounting -- and fast. We do not see how it is possible to expect low rates to continue. Low interest rates and expansionary interest rate policy generally herald a period of rising rates. Good luck with those laddered bond portfolios which have no "tail coverage."


Lifetime SPIAs, whether from a DB plan or purchased with IRA or personal funds, are meant to insure an income for life. This solution still remains poorly accepted by the financial services community. We think that things are already changing with PPA's tax-favored use of deferred annuity balances to fund LTCI policies. SPIAs are embedded with a hedge against rising interest rates. SPIAs are longevity insurance first. Take care of the needs in retirement for your clients, then they can play golf as many times as they want.

1 "How Do Retirees Value Life Annuities? Evidence from Public Employees" John Chalmers, Jonathan Reuter, January 28, 2010, National Bureau of Economic Research in conjunction with the U. S. Social Security Administration

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