Monday, February 11, 2013

Vanguard GLWB Rider To Have Increased Fees

Mark Pozner, who reads this blog, recently spoke on the phone with representatives at Vanguard and learned about some upcoming changes to their GLWB features. This is relevant here, as in all of my research where I investigate GLWBs, I always use Vanguard version as my model. It is significantly cheaper than most of its competition. Here is what Mark wrote:
I just talked to Vanguard who told me of some negative changes they will be making to their VA -GLWB'S  effective May 1, 2013.  The income rider will be increased from .95% to 1.2%.  This even applies to older GLWB'S  for any new money you add May 1 or later.  Also they are reducing the payout rates at certain ages.  Currently for age 59 through 64, you receive 4.5%.  This will be reduced to 4%.  Age 65 through 69 remains the same at 5% withdrawal.  Age 70 through 79 was 5.5% withdrawal  but is being reduced to 5%.  Age 80 and over is being reduced from 6.5% to 6%.  Clearly this reduces the attractiveness of GLWB'S.  Please pass this along since you have a wide readership.
Vanguard does reserve the right to increase the income rider up to 2%. I see they are taking advantage of this to increase the rider by 0.25% in May. This percentage is used to determine the amount you pay each year to obtain the income guarantees. Do note that this percentage is charged on the benefit base rather than the contract value of the assets. The benefit base is the hypothetical amount that represents the high watermark of how high your portfolio grew when determining their guaranteed income amount. As your portfolio depletes, the fee can be a much larger percentage of the reduced amount of remaining assets.

The payout rates are also important, though they do not affect any of my past research as I've always assumed a 65 year old couple who would not be affected by the new change. The payout rates quoted above are for singles, and having the income guarantee on a joint survivor basis for a couple always reduces the payout by 0.5%. the payouts are nominal, and not inflation-adjusted.