Clients can use investment funds provided by Constance program managers. The underlying fees of these funds range from 0.08% of assets to more than 1% of assets.
Midland National sets limits on the portion of a portfolio covered by a Constance contract that may be exposed to stock market fluctuations. Hedging a portfolio with a higher stock allocation limit costs more than hedging a portfolio with a lower stock allocation limit.
Customers can choose their own asset custodians, but RetireOne and Midland National require customers to choose custodians from a list of around 30 financial institutions that use standard data feeds and will let RetireOne monitor the assets.
Midland National notes in the CDA prospectus that any warranty is subject to its own creditworthiness and claims-paying ability.
“The certificate has no cash value, surrender value or death benefit,” the company says in a disclaimer on the front page of the prospectus.
“There have been relatively few contracts introduced to date that offer the type of benefits available under the certificate,” the company said in another disclaimer. “Although the Internal Revenue Service has issued private letter rulings regarding products similar to the certificate, those rulings do not bind the Internal Revenue Service with respect to this certificate.”
Why a CDA?
Finke, who holds the Frank M. Engel Chair in Economic Security at the American College of Financial Services, says in the white paper that a CDA could be a valuable addition to a portfolio because it gives a retirement saver a way to earn money in a portfolio that lasts through retirement.
He gives the example of a birthday cake, at a party where the number of guests could range from 10 to 40.
“How big of a slice would you cut the first friend?” Finke asks. “If the slice is too thick, there may not be enough to feed the 20th child that comes along, leading to tears and great disappointment. To avoid this risk, you cut small slices.
A CDA birthday cake could help the host ensure there’s enough cake for everyone, without having to give each guest a small slice first, Finke says.
Likewise, he said, a CDC can help savers maintain income throughout their retirement years without savers having to skimp on withdrawals early on.
Finke aimed his article at consumers and advisors who are new to the idea of monetizing assets.
It compares the return of a hypothetical portfolio protected by a CDC to the return of an unprotected portfolio, but it does not compare the return of the protected portfolio with the possible return of an indexed annuity or a variable annuity with a characteristic lifetime income plan. .
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