%0 Journal Article %A Geng Deng %A Tim Dulaney %A Tim Husson %A Craig McCann %T Structured Product–Based Variable Annuities: A New (and Complex) Retirement Savings Vehicle %D 2014 %R 10.3905/jor.2014.1.3.097 %J The Journal of Retirement %P 97-111 %V 1 %N 3 %X Variable annuities, which are often marketed to investors in retirement, have become highly varied and complex investments. Recently, a new type of variable annuity has been marketed to investors in retirement and is based on structured product-like investments instead of the mutual fund-like investments found in traditional variable annuities. Embedding a structured product into a variable annuity introduces substantial complexity into an investment typically considered conservative. In this article, we describe structured product-based variable annuity (spVA) crediting formulas and how they differ from traditional VAs, value the embedded derivative position for a range of illustrative parameters, and calculate the fair cap levels required to fairly compensate investors for the derivative position. We also provide extensive backtests of spVA crediting formulas using our calculated cap levels, and compare the results to their underlying indexes. Our findings suggest that the complexity of spVAs can provide flexibility to the issuer by introducing new avenues for revenue generation. On the other hand, the complexity also reduces the comparability of such variable annuities to other investments in the market. These features raise questions of suitability for older American investors, whether approaching retirement or already retired.TOPICS: Retirement, fixed income and structured finance, derivatives applications %U https://jor.pm-research.com/content/iijretire/1/3/97.full.pdf