The Association of U S West Retirees



Setting Up Your Own Pension
As Employer Plans Disappear, Insurers Offer More Products Promising Income for Life
By Tom Lauricella
The Wall Street Journal
Saturday, March 11, 2006

With more companies phasing out traditional pension plans, financial-services companies have come up with an idea -- sell investments that behave a lot like a pension.

One of the first to join the fray was MetLife Inc., which in 2004 rolled out Personal Pension Builder:  You pay now for assurances that you'll receive a steady monthly check in retirement.  A 40-year-old putting away $3,000 a year would get $10,200 a year starting at age 65.

Genworth Financial Inc. has a similar product, ClearCourse, launched last year.  More companies are expected to pile in.  New York Life Insurance Co. is now launching its own version, also called Personal Pension.

There are important differences among these products.  And, compared with mutual funds, they are more complex, offer less flexibility and transparency and come with more restrictions.

Companies are hoping to tap into worries among some investors that either they'll outlive their savings, or that the markets could shift, eroding a nest egg built up in mutual funds, 401(k)s or other retirement investments.  William Kuchta of Paychex Inc., a payroll and benefits-management company, says he started hearing this refrain a couple years ago from his firm's own employees about their 401(k) retirement plan.  With bear-market losses fresh on their minds, "They'd say:  'Can't I have something like a pension?' " Mr. Kuchta recalls.  His company plans to start offering ClearCourse in May, which can be incorporated into a 401(k) program.

Given the long-term nature of these offerings -- you're paying a company now for the promise that it will pay you back decades in the future -- investors need to feel comfortable that the company will still be around in 30 or 50 years.  "That can be a big 'if,' " says Joseph Belth, professor emeritus for insurance at Indiana University.

Since the start of 1995, 76 life and health insurance companies have gone out of business, according to Weiss Ratings Inc., which tracks and rates insurance companies.  While most failures have been at smaller companies, larger firms also sometimes go under.  And when an insurer fails, state-run insurance pools step in to fulfill certain obligations, but investors can have accounts frozen and face other significant hassles.

Strong Survive

For an investor considering one of these products, it's particularly important to pay attention to an insurance company's rating of financial strength.  Several established ratings companies, including A.M. Best, Standard & Poor's, Moody's and Weiss, track the health of insurers.  But each company uses a slightly different scale -- an "A" is the highest rating from Weiss, but at A.M. Best, an "A" is the third-highest ranking.

All these products are based on annuities, a type of tax-deferred investment that has long struggled with a reputation for complexity, high costs and penalties for withdrawing money after it is invested.  The challenge for insurance companies is persuading investors and financial advisers to give these products another look.

"The buyer of today does not want the products of yesterday," says Tom Streiff, director of funds and annuity solutions at UBS.  "They'd love to have lifetime income, but don't want to give up flexibility if they need money."

For some investors, these products can be a help, especially if it appears there's a good chance of running out of money during retirement, perhaps because they got a late start to saving or as a result of a market downdraft.  However, even in cases like that, they're often best used only as a small part of the investment portfolio.  The idea is that they can provide a safety net, so investors can be in position to take slightly greater risks with the remainder of their portfolio, and thus hopefully earn higher returns.

The precise amount of a portfolio that would be allocated to such products depends an individual's circumstances.  It should be determined as part of an overall financial-planning strategy.

And investors need to carefully evaluate the products to understand the tradeoffs.  Guarantees cost money or require some loss of control or some combination of the two.  Often, investors are put in the position of having to decide if it's worth being locked into an investment now, even though they don't have all the information about what the investment landscape will look like in the future.

"How would you have felt about locking in the ability to buy an Oldsmobile sedan today, the prices in place 30 years ago -- and now they're not even selling Oldsmobiles," says Mr. Belth, the Indiana professor emeritus.

Don't Believe Hype

Mr. Belth also warns investors about getting caught up in the marketing hype.  While some new products offer more flexibility than in the past, "they're renaming things with jazzy names ... that aren't that much different than what has been offered in the industry over the last 50 years."

The basic concept is that while mutual funds in a 401(k) plan may provide a great deal of flexibility and work well for building savings over a long period of time, they don't protect against outliving a nest egg.  A 65-year-old today has a life expectancy of another 20 years.  If that person has $1 million in savings, he or she stands a good chance of running out of money by age 85 if they pull $60,000 a year out of their account.

Investors have long been able to convert their savings into a lifetime stream of income at retirement by taking that money and buying what is known as an "immediate annuity."  But an investor's returns on an immediate annuity are highly dependent on interest rates at the time of purchase.  That means a retiree who happens to stop working at a time when interest rates are historically low -- such as now -- will do much worse than somebody who retires at a different time, when rates were higher.  In addition, many investors have a hard time persuading themselves to turn over a big chunk of cash to an insurance company.

That's where the new products come in.  Their concept:  individuals make periodic investments while employed -- in some cases through a 401(k) plan -- and with each one they are guaranteed a certain amount of income for life after retirement.

But there are important differences among the handful of products that have hit the market.  MetLife's Personal Pension is essentially a "fixed" annuity, where an person invests money month-by-month while he or she is employed, in return for guaranteed stream of income during retirement.  The precise return is calculated based on interest rates at the time of each investment in the annuity, but MetLife guarantees that rate won't be less than 3%.  (Currently, it's around 5%.)

A fixed annuity such as this makes sense for an investor whose goal is to have a predictable level of income, irrespective of what happens in the markets between the time the investment is made and retirement, the company says.

A version of MetLife's Personal Pension Builder is also available for 401(k) plans.  But there is an important distinction between it and mutual funds that populate most 401(k)s:  Unlike with a mutual-fund investment, money can't be switched into another investment in the 401(k) plan.

Withdrawal Pains

Even if an investor wanted to withdraw money outright from the plan -- and incur tax penalties -- MetLife requires companies that offer the option to prohibit employees from taking money out of their Personal Pension account until after they have withdrawn money from all other investment options.  Then, once that requirement is met, MetLife can levy a 1% "surrender charge" on the amount withdrawn.

The company says the restrictions are appropriate because the product is meant to be a substitute for pensions, which don't give employees access to their money while they are still working.

MetLife also reserves the right to change the formula on future investments for calculating the guaranteed return, which is in part based on life expectancy.  For example, if people continue to live longer and MetLife has to make payouts longer, it can change the formulas in ways that could reduce returns.

Genworth takes a slightly different approach with its ClearCourse product.  It is structured as a variable annuity, which is essentially a mutual fund wrapped in an insurance guarantee.  Unlike a fixed annuity, it won't provide a specific guaranteed return.  Instead, returns vary based on fluctuations in the market. In this case, an individual's money is placed in Genworth's $1 billion balanced fund that invests in a conservative blend of stocks and bonds.

Genworth does, however, provide a minimum guaranteed return in ClearCourse based on the amount of time before retirement at age 65.  This, the company says, makes the product attractive for people who want the potential to profit from good times but have the assurances of a floor should the market head south.  A 40-year-old putting $3,000 a year into ClearCourse is guaranteed at least $8,272 a year for life after retirement at age 65.  A 50-year old is guaranteed $3,462 on the same investment.  That amounts to a minimum 3.5% rate of return for the 40-year-old and 2.5% for the 50-year old.

Peter Katt, a fee-only insurance adviser based in Mattawan, Mich., says he considers the guaranteed returns on ClearCourse lackluster.  The guarantee "would be more valuable if the investor could direct their investment to high risk, high-reward accounts," he says.

ClearCourse lets an investor switch out at any time without a penalty.  However, investors are charged 0.8% of assets to pay for the guarantee.  If an investor pulls out, they don't get that money back.

In the New York Life product, men and women get different rates.  Investments in 401(k) plans have to treat men and women the same under federal guidelines.  But standalone insurance products typically have separate rates since women on average live longer than men.  A 40-year man putting away $10,000 a year until age 65 would receive annual income of $16,336 and a 40-year old woman would received $14,460.

Write to Tom Lauricella at