The Importance of Actively Adjusting RILA Account Allocations

David BlanchettAssets in registered indexed linked annuities (RILAs) continue to increase, with estimated sales approaching $50 billion in 2023 according to LIMRA, almost surpassing traditional variable annuities. Roughly 75% are tied to the S&P 500 index, an effect that has been relatively constant over the last five years and differs notably from fixed-indexed annuities (FIAs) where a variety of indexes are used.

Advisors can periodically adjust the allocations to indices within a RILA. For example, they can set the percentage of assets that are linked to indices such as the S&P 500, Russell 2000 or MSCI EAFE.

This article explores the benefit of the optimal allocations to RILA crediting strategies using expected returns and a model that accounts for the unique (non-normal) return distributions of RILAs. The results suggest optimal allocations within a RILA can change notably over time. Using optimal time-varying weights can increase expected risk-adjusted returns by approximately 50 bps when compared to using only the S&P 500 index or a constant equal-weight approach (across the six strategies considered).

While other tools exist to help advisors determine how to allocate within RILAs, they typically define risk as standard deviation and use purely historical returns, two assumptions that are suboptimal. Therefore, I recommend tools and solutions that provide guidance to more effectively build portfolios within RILAs given the constantly changing market conditions.

RILAs: An overview

RILAs are a form of variable annuities (VAs) and combine features of FIAs and traditional VAs, and provide investors with partial downside protection in exchange for a limit on upside returns by buying and selling financial options. RILAs are also known as “structured annuities,” “structured-note annuities,” “structured-indexed annuities,” and “indexed-variable annuities.” RILAs are “registered” because only representatives registered with Financial Industry Regulatory Authority (FINRA) can sell the product. Approximately 20 insurers offer RILAs.