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Profiting with Synthetic Annuities: Option Strategies to Increase Yield and Control Portfolio Risk by Michael Lovelady

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1. Introduction

If you Google the term synthetic annuity, you won’t find much. There is a reference to an obscure tax issue, as well as an article about design projects by several investment firms and insurers who believe the next Holy Grail is an annuity-like product for 401(k) plans that allows participants to convert highly volatile assets into defined benefit type payments.

According to the article, the product rollouts are moving slowly, despite the names behind them: Alliance Berstein, AXA, Barclays Global Investors, John Hancock, MetLife, and Prudential. The products, called hybrid 401(k)s, combine investment portfolios with annuity contracts. The annuities are purchased gradually over time. As plan participants get closer to retirement, ...

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