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
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
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.
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
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
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
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.
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
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
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
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.
Tom Lauricella at