GLWB Lite: Lower Costs but Much Worse Benefits

There is an emerging interest in guaranteed income solutions (annuities) for retirees among financial advisors and defined-contribution (DC) plan sponsors. At the same time, though, market dynamics have created challenges with offering certain products that provide lifetime income, in particular products with a guaranteed lifetime withdrawal benefit (GLWB). In response, some of the newer GLWBs have been introduced with lower fees and notably weaker benefits, which I refer to as “GLWB lite” in this article.

I’ll provide an overview of GLWBs, some context around the changes in the GLWB space, and analyze the expected economic benefits of these annuities versus other common approaches to generating guaranteed income.

While the lower fees associated with GLWB Lite products make them seem more attractive, the expected income is significantly lower than other annuities available today (and the alternative approaches considered in this analysis). Financial advisors and plan sponsors should take pause before selecting these products for clients. Additionally, given the current low bond yield environment, delaying claiming Social Security is likely to provide the most income for retirees and should likely be considered and optimized before using a private annuity.

GLWBs: A brief introduction

Early research on the potential benefits of annuitization primarily focused on more traditional, relatively simple guaranteed income products such as single-premium immediate annuities (SPIAs), also referred to as immediate-fixed annuities, and deferred-income annuities (DIAs). Despite the noted benefits of SPIAs and DIAs and annuities in general, they remain relatively unpopular among retirees, an effect commonly dubbed the “annuity puzzle.”

While there are a variety of potential explanations for the annuity puzzle, one notable barrier to usage is the irrevocable design of many annuities (e.g., SPIAs), which require the annuitant to permanently cede the premium to receive the lifetime income. The irrevocable aspect of SPIAs and DIAs is likely a key reason that sales of the products have been relatively low.