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Fee-for-Rate Growth FIAs Have Begun Strutting Their Stuff

By , with Annuity FYI

Growth FIAs don’t offer guaranteed income riders, but then most people interested in them already know that. And like their income-oriented income FIA cousins, they still guarantee against index losses.

A handful of growth FIA purveyors have sharply increased participation rates for select growth FIAs in exchange for an annual fee of 1% to 1.5% a year.

Times frequently change in the financial world, and it’s helpful if annuity purveyors recognize this and respond accordingly. In particular, this is the case these days with some historically popular, growth-centric fixed indexed annuities (FIAs), and that’s a good thing for prospective buyers. This is true even though it means they have to pay fees – or the equivalent of fees – for high potential returns for essentially the first time.

So-called index participation rates – the percentage of the performance of the index an FIA owner actually pockets – have been declining in tandem with interest rates in general because the Federal Reserve cut interest rates nearly to zero in reaction to the Covid-19-sparked recession in 2020. Rates remain unchanged, despite the end of the recession, because the durability of the rebounding economy is still uncertain.

This makes growth FIAs – which, unlike income FIAs, don’t offer guaranteed income for life – less attractive. But select growth FIAs, such as Midland RetireVantage 10, Midland Summit Edge 5, and American Equity AssetShield 10, have decided they don’t want to passively accept this situation.

Fee-for-Rate Pricing

So, for a 1% or 1.5% annual fee or fee-equivalent, they’re offering prospective customers much higher participation rates than they could otherwise get. This practice is called “fee for rate.”

These annuities are sold as 5 or 10-year contracts and typically offer multiple low volatility indexes, which invest in bonds and commodities, as well as stocks. Over time, they usually don’t perform as well as an all-stock index but can realistically generate an average annual return of 6% to 8% – far more than plain-vanilla fixed annuities – and are less volatile.

As an example, consider Midland National RetireVantage 10. If you invest at least $75,000 in the S&P MARC 5% multi-asset index, one of the options it offers, and sign on to two-year index performance crediting, the index participation rate is a truly generous 175%. For 1% annually, it’s entirely possible for Midland to beat many traditional stock funds over its 10-year period. By comparison, investors in the product who pay no fee have to settle for a 120% participation rate.

Strong Prospects for Continued High Participation Rates at Midland

Midland guarantees these rates for only two years. Nonetheless, the odds are good that the participation rate will remain highly attractive, if not quite this high, because the company collects additional revenue on this product and is understandably motivated to keep things this way.

Prospective investors have the option of investing as little as $20,000 in RetireVantage 10. The participation rate is lower but still a respectable 145%.

The concept of fee-for-rate is not altogether new. Athene, among other annuity purveyors, has offered these in the past. It was not successful, however, because participation rates on its no-fee FIAs, while lower, were still attractive and charged no fee at all.

Might Investing in a Simply Stock Fund Be Better?

Given the reintroduction of fees on growth FIAs today, some prospective investors may wonder if they might be better off simply investing in a stock index fund, which charges super-low rates and offers the opportunity to invest 100% in the stock market.

Which is the best route, of course, depends on the individual investor, but what all FIAs offer – and stock and ETF funds do not – is a guarantee not to lose money in a down market over the course of any 12-month period. “Many investors want to know that their investment is protected,” says an investment professional familiar with FIAs.

It’s also worth noting that it may not be entirely appropriate to directly compare a growth FIA – one with a fee or not – with a stock fund because most investors in stocks complement this with an investment in bonds to help sooth volatility. Bond rates currently are unusually low and hence generate mediocre returns. Moreover, should bond rates rise at some point, the value of bonds held by investors would decrease. This scenario is a distinct possibility.

For prospective investors interested in fee-for-rate growth FIAs, here are additional details on multiple offerings:

  • Midland RetireVantage 10.

    In addition to the S&P 500 MARC 5% index, investors can invest in the Fidelity Multifactor Yield Index 5% and BlackRock ESG 5% Index. Whether they invest the $20,000 minimum or $75,000 or more, they can split their money in all these indexes if they choose.

    Fidelity MFY offers a whopping 180% participation rate on a two-year contract. (There is no one-year term with enhanced participation rates). It blends six stock indices, including a dividend yield index, a value index and a momentum index, with additional exposure to U.S. Treasury notes.

    The BlackRock index enables investors to integrate non-financial sustainability considerations, such as environmental, social and governance risks and opportunities, into their investment process. BlackRock believes that sustainable investing is about investing in progress and recognizing that companies solving the world’s biggest challenges can be best positioned to grow. Simultaneously, the index targets companies with positive sustainability characteristics and avoids those without.

    BlackRock offers a 125% participation rate on a one-year contract. (There is no two-year term with enhanced participation rates).
  •  Midland Summit Edge 5.

    This is the only growth FIA on our list offering a five-year contract, an advantage for people who don’t want to lock themselves into a longer contract in what are typically fluctuating markets over time.

    It offers an investment in the aforementioned Fidelity MFY index. For investors who invest at least $100,000, the index participation rate on a two-year contract is 160%. The participation rate on a one-year contract is 100%. Buyers also have the opportunity to invest as little as $5,000. In this case, the index participation rate on a two-year contract is 150% and the rate on a one-year contract is 100%.
  •  American Equity AssetShield 10.

    American Equity AssetShield 10 has the highest annual fee – 1.5%. On the positive side, however, it is the least pricey investment in the Credit Suisse Tech Edge Index, SG (Societe Generale) Global Sentiment Index or the S&P 500 Index. In any one or two of them or all three, the minimum investment is only $5,000.

    CS Tech Edge focuses on four stock ETFs that focus on innovation and technology, such as biotechnology and semiconductor funds. The index also invests – much more heavily – in 10-year U.S. Treasury notes.

    As its name suggests, SG Global Sentiment relies on a proprietary “sentiment indicator” on a monthly basis to assess multiple cross-asset capital market variables in Asia overall, the U.S., Germany, and Japan. The index determines whether these economies are in the growth phase, intermediate phase, or shrinking phase. After this assessment, the portfolio weights allocations in its individual markets across stocks, government bonds, and commodities.

    Which of these options is best for an individual will depend on his or her particular preferences. What seems clear, however, is that these are solid and attractive investment opportunities that warrant a look for all but the most conservative folks in the market for annuities.

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