Issue 2 Vol 10 | Summer 2019

IRI Insured
Retirement
Institute
myIRIonline.org

CAN ANNUITIES SAVE INVESTORS

FROM THEMSELVES?
New research suggests variable annuity subaccount investors behave more prudently

By Cory Clark
Chief Marketing Officer, Dalbar, Inc.

An investor’s risk tolerance is not homogenous,

nor is his behavior. This thinking underlies
many wealth management approaches that
assign goals to certain buckets of funds
and will allocate each of those accounts
based on the varying risk tolerances and
time horizons associated with the goals.
Each of those accounts represents a
potentially different risk tolerance and
also a propensity for different behavior.

Investors hate to lose more than they like to

win,1 so when dealing with a goal of utmost
importance such as retirement, a vigilant,
conscientious investor will inevitably have
to face his worst fear – losing money. And
with that will come a decision to either react
or stay the course. DALBAR’s Quantitative
Analysis of Investor Behavior (“QAIB”) study
has shown that when investors react, they
do not mitigate losses; but more often than
not exacerbate them. Last year serves as
a classic example. In 2018, the S&P fell
off - 4.38% and the average investor was
a net withdrawer of equity assets during
the year. However, despite taking money
off the table during the year, the average
equity investor ended the year with twice
the losses of the S&P. If an investor could
be insulated from this sort of emotional
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Continued from page 1
decision - making, what difference could that make it achieving a
long-term goal such as retirement?
New research by DALBAR suggests that variable annuities may do
just that: save investors from themselves. DALBAR’s latest piece
of investor behavior research entitled, Quantitative Analysis of
Investor Behavior – Variable Annuities (“QAIB-VA”) found that the
average subaccount investor was more patient and less likely to
chase returns by moving in and out of investments within their
equity portfolio. This resulted in better returns overall, which brings
to light variable annuities’ place as an outstanding retirement
savings vehicle while at the same time casting doubt on the notion
that variable annuities are too expensive.
ANNUITIES AS A RETIREMENT SAVINGS VEHICLE
Annuities have long been associated with retirement savings.
Guaranteed income and tax benefits are tops on the list as to the
reasons why, but annuities by their very nature can also promote
long-term, goal-oriented thinking among their contract owners.
One of the consistent messages DALBAR has stressed over the
years is for advisors to mute investor behavior by shifting the focus
away from performance and towards achievement of a pre-defined
goal. With respect to retirement, goals are best expressed as a
future income stream, in terms of income replacement percentage.
This positions the annuity contract well to be an insulator from
2000-2018 (In Years)
Dalbar, Inc. © 2019
Summer 2019 | myIRIonline.org
emotional investing by keeping the contract owner’s eye on the
ultimate prize (the goal) and not index-beating returns.
Defined contribution statements have begun to shift the focus of
their participant reporting away from balances and performance
and more towards projected future income streams, often compared
to a desired income replacement percentage. This reporting
facilitates the ultimate comparison against retirement goals. An
annuity’s entire purpose revolves around the future income stream
and so this orientation comes natural, although annuity reporting
has a long way to go to fully leverage the value of goal reporting.
But do variable annuity investors really behave differently than other
investors? The answer is an emphatic yes. Since 2000, the average
subaccount investor stayed invested in their equity subaccounts
for an average of 281 days longer than the average equity mutual
fund investor. That’s a holding period over 9 month longer, which
is quite significant given historical context. The average mutual
fund investor stayed invested in their funds for 2.5-4.3 years since
2000 with an average of 3.65 years over that time. Even the average
investor probably knows that bouncing in and out of investments
every three and a half years is not a prudent strategy, but that is
not enough to keep them from doing it. On the other hand, the
average subaccount investor stayed invested between 2.4-5.5
years since 2000 with an average of 4.42 years over that time.
Now this probably isn’t the ideal holding period either, and nobody
19 yr. Average Equity
Subaccount Retention Rate =
4.42 years
—
19 yr. Average Equity Mutual
Fund Retention Rate =
3.65 years
281 days
2
said subaccount investors were perfect, but the patience they have
displayed consistently over the past 19 years deserves attention.
For an advisor, nothing is more frustrating than placing a client
into a strategic asset allocation based on long-term patterns
and correlations, only to have that allocation disrupted due to
emotional decision-making on the part of the investor. The above
described findings from the QAIB-VA study support the notion that
subaccount investors are less likely to alter their allocations over
the long-term, giving a strategic model portfolio within a variable
annuity more freedom to play itself out through market cycles as
Modern Portfolio Theory suggests.
RE-EXAMINING THE COST-BENEFIT ANALYSIS
OF VARIABLE ANNUITIES
The behavior of subaccount investors does not just speak to
annuities’ place as a retirement goal vehicle. Subaccount investor
behavior has led to results that beckon one to re-examine the
cost-benefit analysis of the variable annuity product.
Earlier in this article, I referenced 2018 as a year in which the
average investor attempted to mitigate losses and ended up
doubling them instead. In 2018, the average subaccount investor
also underperformed the S&P 500 (again, nobody said they were
perfect) but by 223 bps less than the average investor. In fact,
the average subaccount investor has outperformed the average
Past performance is not a guarantee of future results. Individuals cannot
invest directly in an index. Guarantees are based on the claims-paying ability
of the issuing insurance company. Variable annuities are long-term financial
products designed for retirement purposes. There are fees, guidelines,
limitations, restrictions and risks to consider. Withdrawals or surrenders may
be subject to ordinary income taxes and, if made prior to age 59½, may be
subject to a 10% IRS penalty. Variable annuities are subject to market risk
including loss of principal.
Please refer your clients to the appropriate variable annuity prospectus.
Investors are asked to consider the investment objectives, risks, charges,
and expenses of the investment carefully before investing. The lying fund
prospectus contains this and other information about the product and the
underlying investment options. Please remind your clients to read the
prospectuses carefully before investing.
3 Summer 2019 | myIRIonline.org
investor by 75 basis points or more in each of the past 5 years
and outperformed the average investor overall in each of the
last 10 years.
If the major objection concerning variable annuities is that they
are too expensive, those expenses must be measured against
the benefits to arrive at an ultimate conclusion. If we were to
compound an additional 75 basis points of earnings here and 223
bps of earnings there, how would could that change the calculus?
Of course the average subaccount investor doesn’t always outperform
the average investor, but the behavior is clear. Subaccount investors
don’t move in and out of funds as often as the average investor
does and this patience has led to more money earned for each
dollar invested.
Cory Clark is Chief Marketing Officer at DALBAR, Inc., the nation’s leading
independent expert for evaluating, auditing and rating business practices of
financial services companies. Cory is also a practicing attorney licensed in
Massachusetts. He resides near Boston with his wife and 3 children.
1
 ahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision
K
under risk. Econometrica, 47, 263-291. (Loss Aversion refers to a tendency
to feel more negative feelings about giving up an object than positive
feelings associated with acquiring it.)
New York Life Variable Annuities are issued by New York Life Insurance and
Annuity Corporation ("NYLIAC"), a Delaware Corporation, and offered by
registered representatives of NYLIFE Securities LLC, Member FINRA/SIPC,
a licensed insurance agency. Both NYLIAC and NYLIFE Securities LLC are
wholly-owned subsidiaries of New York Life Insurance Company, 51 Madison
Avenue, New York, NY 10010.
For internal registered representative use only
SMRU 1826323 (8/20/2020)