What are the primary issues related to the GLWB or income riders currently available on annuities?

1. POINT OF VIEW - GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB)
Part of a thought leadership series presented by …
Garth A. Bernard, President & CEO
THE SHARPER FINANCIAL GROUP LLC
May 11, 2008
(updated as of October 2010)
©2010 The Sharper Financial Group, LLC Page 1 of 5

2. POINT OF VIEW - GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB)
SFG acknowledges the value of and need for guarantees against downside market risk, but we question
the value and use of popular GLWB approaches due to various concerns:
 We acknowledge the value proposition: It is not surprising that consumers are very concerned
about protecting their retirement investments from downside market risk; there is a perfect storm
brewing right now – the tidal wave of baby boomers are beginning to retire at the same time that
there are major stresses in the investment markets and in the broader economy – that underscores
the need for vehicles that can address these real consumer concerns. Poor investment performance
can devastate a retirement portfolio, derailing well laid retirement plans and destroying the
confidence of retirees in having a secure future. Retirees can’t afford to make any mistakes with
their portfolio – so we see the need to address this risk.
 There are questions about the value of these popular approaches: GLWBs in variable annuities or
unbundled and placed on mutual funds and on 401ks are clearly only one approach to addressing
the problem of protecting investors from downside market risk, providing guaranteed lifetime
income, and providing access and control of assets while allowing some participation in upside
potential. However, investors and their advisors should be clear on whether these vehicles provide
the best value for the money involved. We have some concerns about the lack of transparency in
these vehicles:
o Complexity:- The designs of the popular GLWBs are extraordinarily complex primarily due to
the existence of a “benefit-base” mechanism whose sole purpose is to define the amount of
the guarantee. However, this mechanism leads to major confusion because there are many
moving parts, calculations and contingencies involved in the changes to the benefit base.
This complexity can lead to gross over-simplifications and misplaced expectations on the
part of consumers and advisors, with serious compliance and suitability implications. For
example, the roll-up rates typical on GLWBs are often misinterpreted as a guaranteed
minimum on the performance of the underlying funds when it is anything but that.
o Nomenclature:- The name of the feature – guaranteed lifetime withdrawal benefit – is
somewhat of a misnomer. It is not the withdrawals themselves that are guaranteed since
the investor is making withdrawals of their own annuity account values for as long as
possible. The insurance benefits are the amounts paid, if and only if, the funds are depleted
by withdrawals. This benefit is better described as a contingent deferred income annuity.
o Fees:- the total fees for variable annuities including these protection features are quite high
(about 3% to 3.5% per year) and makes one wonder if this protection cannot be provided at
a lower cost – in fact, many insurers reserve the right to double the rider fees if the
guarantees are reset higher so you could be talking 4% to 4.5% per year. In addition, fees on
the GLWB may be based on the “benefit base” and not on the account balances – this leads
to actual fees that may be significantly higher than the nominal fee percentage for the
GLWB. When it comes to retirement income, every dollar of fees that goes to the insurers
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3. POINT OF VIEW - GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB)
and fund managers that could otherwise be saved represents another dollar that could
otherwise have gone to the investor.
o Value of the downside protection:- we believe that following the identical withdrawal and
investment constraints prescribed by a GLWB but on withdrawals outside of a variable
annuity without the incremental fees may in fact not involve a significant risk of depletion;
since the GLWB benefit is not the variable annuity withdrawals themselves, but rather is the
series of insurance payments made only if the variable annuity account is depleted, it would
seem that the rider fees that may be paid for many years may provide a relatively small
benefit. Of course we understand that withdrawals outside the variable annuity would not
be guaranteed, but we have concerns about how much insurance value is being provided in
relation to the insurance fees paid.
o Misplaced upside expectations:- the reset provision in these features is often touted as
enabling the guaranteed withdrawals to “keep up with inflation”, however we are quite sure
that this is highly unlikely given the withdrawals taken (5%), total variable annuity fees (3%)
assessed plus inflation (3%) that the fund performance consistently needs to cover if the
reset is actually going to keep up with inflation - that’s 11% per year which would be
phenomenal even in the best scenarios; this could lead to very disappointed retirees if they
have this expectation going in that the withdrawal stream will keep up with inflation.
 There are alternatives which may provide substantially better consumer value:
o The simplest and cheapest approach to providing downside protection against market
performance is a put option, and in the variable annuity world this is a GMAB. Not only is
this feature simple and uncomplicated, this benefit can protect future cash values and
provide investors with more control of their future options including the purchase of an
immediate annuity for guaranteed lifetime income, and it gives them the very choice of
which financial provider they will use at the time they wish to exercise those options.
o It is easily possible to design a next-generation GLWB which offers substantially better
consumer value. In particular, current GLWB designs make a critical unstated assumption
and force a particular choice or trade-off on the investor seeking this form of guarantee:
there is an assumption that the investor values a lifetime income guarantee at the same
level as the current income (withdrawal limit) offered in the current designs. However, by
dropping this assumption, it is possible to create designs which produce more current
income, with an attractive guarantee and ultimately higher guarantees, at substantially
lower fees. In addition, such designs can provide higher asset accumulations with greater
upside participation (because of the substantially reduced fees.) Such new designs can also
completely eliminate the “benefit base” and the excessive complexity associated with it.
Finally, next-generation designs of this nature may reduce or eliminate the strict constraints
on the asset allocations that are available for investment when the GLWB is selected (which
could potentially provide even more upside opportunities to the investor.)
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4. POINT OF VIEW - GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB)
o It is a well known fact that immediate annuities provide the highest amount of lifetime
income for a given amount of assets. They do require that the consumer trade-off liquidity
for the portion of the portfolio that is allocated to the immediate annuity. Many advisors
make a big deal about this, but this is only an issue if you try to solve the problem from a
product-centric stand-point. Instead we believe that consumers’ needs are nuanced and
that guaranteed lifetime income sources should be used to offset the consumer’s basic
lifetime expenses such as food, shelter and clothing that is not being met by social security
and defined benefit plans. We do not believe they necessarily need lifetime income for all
their expenses since some expenses are discretionary. But that is what you get with a single
product approach such as GLWB – an “income hammer” looking for “expense nails”.
o Our point of view is that efficient lifetime immediate annuities should be used to secure a
minimum floor of lifetime income before other less efficient lifetime income approaches are
used. This way, not only can consumers’ needs-based concerns about downside risk be
addressed, but they will have more of their investments available to address other concerns
which may be high in their list of priorities such as chronic and acute health care needs.
Ultimately, combinations of immediate annuities with other retirement income products,
such as more effective GLWB designs, retirement income mutual funds, systematic
withdrawals, etc, may provide more robust income, guarantees, inflation protection and
asset growth, as well as greater flexibility and control for investors than any single
retirement income product.
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5. POINT OF VIEW - GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB)
GARTH A. BERNARD, MAAA
Mr. Bernard is Founder and CEO of the Sharper Financial
Group, a consulting practice specializing in design and
marketing of retirement income solutions. He is also CEO
of Thrive®, a firm that markets and distributes a retirement
income selling system that is supported by a web-based
platform for delivering solutions. He is also a Principal of
Retirement Income Solutions Enterprise. RISE® helps
advisors profitably educate, win and satisfy more clients
with compelling retirement solutions delivered via a
process called Mature SimplicityTM.
Mr. Bernard has over 25 years of experience in the US and Canadian financial services industries
and is widely recognized as an expert in retail and in-plan retirement income solutions and
annuities. He has written several articles on both subjects and is often quoted in national and
industry media. He has been a frequent speaker and participant at retirement industry
conferences and serves on numerous retirement industry committees.
Prior to launching his own company, Mr. Bernard was a senior executive at MetLife where he
was responsible for developing innovative retirement solutions including a broad suite of
investment and insurance products and for product management of several annuity product
lines across MetLife’s retail distribution channels. He also held executive level roles at Keyport
Life, ReliaStar Northern Life, Providian Capital Management, Transamerica and National Life of
Vermont where he had responsibility for various functions including marketing and product
management, asset-liability management, reinsurance pricing and customer relationship
marketing for life and annuity lines.
Mr. Bernard is Past President of the International Association of Black Actuaries. He is a
member of the Advisory Board for the American College’s Retirement Income Center. He also
serves as the contributor for “Ask an Expert” at the Center for Due Diligence. He has been a
Member of the American Academy of Actuaries for over 20 years, and holds a Masters degree
in Mathematics from the University of Waterloo, Canada.
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