Contingent deferred annuities (CDAs) represent an interesting approach to securing lifetime income but have struggled for recognition in the marketplace since their introduction more than a decade ago. Recent developments, however, offer the product a chance for new life and offer advisers an opportunity to build out their toolkits for assisting investors who want a more secure investment program.
CDAs act very much like a guaranteed lifetime withdrawal benefit (GLWB) under a variable annuity contract, in that an investor can receive lifetime income payments, even if the investor’s assets covered by the CDA have been depleted; and the amount of these continuing payments is guaranteed so long as the investor’s withdrawals have not exceeded specified amounts. Unlike GLWBs, however, the assets covered by a CDA don’t have to be held by an insurer as part of an insurance contract. Instead, CDAs, though issued by an insurance company, can be used as a “wrapper” around, for example, mutual fund shares or other investments owned by the investor and managed by the investor’s adviser.
Moreover, unlike GLWBs, which carry fees that generally must be paid until asset depletion or contract surrender, CDAs can be purchased that cover a more limited period of time. For example, a CDA might be purchased to cover the period immediately preceding and following retirement that is often referred to as the “fragile decade,” because of its importance to the protection of retirement savings. Specifically, adverse returns on retirement assets during this period can be especially devastating for retirees, and CDAs can provide more efficient protection against this or other “sequence
of returns” risks.
That said, several impediments may at least partially explain the difficulty CDAs have had in the marketplace. One is that, as of now, the Interstate Insurance Product Regulation Commission, also known as the Insurance Compact, has not adopted a uniform standard for this product. So prospective issuers have had to file their CDA contracts for separate approval by each member state of the Compact, instead of making just a single filing that would satisfy all of those member states. Earlier this year, however, the American Council of Life Insurers (ACLI) requested the Compact to adopt such a common standard. The ACLI noted that “the market would benefit from the clarity and consistency the [Compact] would bring to the CDA market.”
A perhaps more serious impediment has been that CDAs have been offered by only a relatively small number of brokerage firms, limiting their availability. Certain technology vendors, however, are now developing online platforms that would allow advisers to assess and offer annuity products from multiple carriers. These platforms could be used by any carrier willing to standardize a CDA offering in a way that would allow the platform to facilitate comparisons with the offerings of other carriers.
To be sure, these developments do not assure future growth in the use of CDAs. Advisers may be uncomfortable with portfolio allocation restrictions that CDAs (like GLWBs) necessarily entail. While the potential development of online platforms to facilitate the offering of these products is encouraging, it remains to be seen whether enough underlying funds will be willing to engage with carriers on the administrative infrastructure needed to develop viable products. And, while CDAs offer one alternative to conventional annuities for securing retirement assets, it is by no means the only one. As always, the marketplace will decide.
