On November 9, 2022, the National Association for Fixed Annuities (NAFA) presented a webinar for members entitled, “Retiring with Confidence: A Case for Using FIAs in Pre-Retiree Accumulation Portfolios.” The webinar was led by Igor Zamkovsky, a Product Specialist at BlackRock.

Zamkovsky presented research on the performance of fixed index annuities (FIAs) in a variety of hypothetical portfolios. FIAs are a type of annuity that grows in value based on the performance of one or more equity market indexes. When you purchase an FIA, you can choose which index to allocate your premium towards.

FIA Performance in Portfolio Scenarios

The research Zamkovsky presented during the webinar found that FIAs can offer a greater upside in median scenarios when suitably funded. This means that under average equity market conditions, an FIA provides greater returns than other means of allocation.

Under poor market conditions, Zamkovsky’s research proved that FIA products could shield a portfolio from the most disastrous effects of an economic downturn. FIAs have a number of features that enable them to curb losses, including interest rate floors and the option to allocate some of the annuity’s funds to fixed investments. 

The webinar also examined the performance of FIAs in a conservative or cash-heavy portfolio. Zamkovsky pointed out that for portfolios that hold a lot of cash, inflation and low bank rates pose a serious risk of eating away at the purchasing power of the portfolio. Allocating some of that cash into an FIA was found to improve returns in median or poor market scenarios.

Benefits and Trade-Offs of Volatility-Controlled Indexes

The webinar also explored the benefits and trade-offs of volatility-controlled indexes, a popular option for FIA products. A volatility-controlled index fluctuates with the market and shifts holdings to less risky investments, like bonds, when the market is more volatile. When the market stabilizes, the index shifts holdings back into equities to maximize returns.

The main benefit of volatility-controlled FIAs, as outlined in NAFA’s presentation, is the increased confidence in how your annuity will perform. Because volatility-controlled indexes essentially cut off the left tail and the right tail of the bell curve, you can be confident in your portfolio’s performance resting somewhere in the middle.

The trade-off here is that these annuities are less likely to perform outstandingly well. In exchange for preventing extreme negative outcomes, a volatility-controlled index also prevents the FIA from an extreme positive outcome. But again, as Zamkovsky pointed out, this dynamic helps to create more certainty about the annuity’s performance, which is critical for investors who want to accurately plan for income in retirement.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 11, 2023