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GLBAs Struggle in Low-return Environment

Industry blogger Michael Kitces raises doubts about the attractiveness of guaranteed living benefit annuity (GLBA) riders, which have the appeal of ensuring a certain withdrawal while providing an upside when markets are strong. The issues raised by Kitces apply to the DC industry’s discussion about retirement income, as people are concerned about outliving their retirement savings but also want to participate in the market.

By offering a floor with upside potential but lower expected returns and higher costs, GLBAs have turned the proposition sideways so that, as Kitces explains, it becomes “… a floor that will be almost impossible not to fall down to and hit. In other words, what was supposed to be a floor that would only be relied upon in a worst case scenario may instead turn out to be the best case scenario and an unavoidable outcome instead!”

What has changed since the days when GLBAs were so hot? Kitces offers three factors:

• Costs have increased from 25-50 BPs before the recent financial crisis to 75-125 BPs, with options to go higher that could approach 2%-4% if raw M&E charges are added.
• With lower expected returns, there’s more limited upside potential.
• Investors are required to have diversified portfolios, with many at 40% invested in low return, fixed which may be lower than the actual costs.

So either spend more conservatively and invest in lower-cost portfolios, Kitces recommends, or buy a single premium immediate annuity and invest the rest individually.

An interesting discussion that speaks to the heart of why in- and out-of- plan retirement income products have struggled to gain popularity. Do you agree?

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