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Investors learned a hard lesson coming out of the pandemic: Diversified portfolios don’t always mean diversified results.
To help smooth out big market swings, consultants and investment committees might reconsider an option available for more than a century, but has only recently been thought of as its own asset class—fixed annuities. Consider:
- Fixed annuities offer capital protection, guaranteed return and guaranteed income in any market environment.
- No single asset class can tackle every risk but a retirement plan allocation to a secure asset like a fixed annuity lowers volatility, ensures stability and protects against longevity.
Go deeper: portfolio allocations and risk
Fixed annuities, like bond funds and other traditional fixed income assets, should be considered in terms of their risk profile. Most investments carry some element of these four risks; fixed annuities can mitigate some of them.
- Market risk. Fixed annuities’ always-positive returns stabilize portfolios in ways other investments can’t, relying on an insurance company’s access to long-term, high-yielding assets to guarantee a return.
- Credit risk. Plan sponsors have a fiduciary duty to evaluate their plan’s investment offerings. When it comes to annuities, that means ensuring the provider has the financial stability to make good on its promises.
- Longevity risk. Living longer means a greater chance you’ll outlive your money. Fixed annuities offer the option of a dependable paycheck in retirement.
- Liquidity risk. In general, fixed annuities don’t mitigate liquidity risk. Many in-plan fixed annuities have delayed liquidity; withdrawals must be done in installments over several years or not until employment ends.
Bottom line: portfolio resilience and guaranteed income
When it comes to choosing a plan’s qualified default investment alternative [known as QDIA], Benny Goodman of the TIAA Institute says a fixed annuity belongs in the mix. Having some savings invested in an annuity ensures not only guaranteed returns and stability but also a retirement paycheck for life.
“The whole reason people have 40% of their portfolios in bonds and cash is because they want less-risky investments just in case the market crashes,” Goodman says.
“But because they annuitized, they already have the less-risky part taken care of. If they want, they can now invest much more aggressively with the rest of their portfolio.”
Learn moreOpens pdf about how annuities temper portfolio volatility, and how to help plan participants take advantage of them.
