3 reasons to consider indexed annuities as an alternative in qualified plansArticle added by Kevin Startt on February 12, 2013
Kevin Startt, GA
Joined: June 21, 2012
Ranked: #70 (911 pts)
Winston Churchill, know for his many memorable quotes, once said, "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes (John Maynard Keynes), in which case you get three opinions." The world’s economists are printing money faster than Lindsey Lohan probation violations and are under the spell of Keynesian economics, which encourages government intervention in monetary and fiscal policy. A similar debate continues about whether or not an annuity belongs in a qualified plan. This remains an age-old argument.
The justification, along with a plethora of other growing suitability questions, is on every FINRA exam for broker-dealers and many life carriers for non-registered representatives. John P. Huggard, J.D., CFP is known for his groundbreaking work about whether variable annuities belong in qualified plans. Haggard also wrote the book “Fifty Reasons Why Variable Annuities are Better Long-Term Investments than Mutual Funds." Most of Huggard’s work has been vindicated, and, with permission, he agrees that most applies to indexed annuities as well — especially since fixed index annuities are a viable alternative to bonds and bond funds and, after two major bear markets and a Great Recession, especially as a qualified plan option.
Huggard views on indexed annuities as an alternative in qualified plans have recently been supported, especially with the record growth in income riders. Here are three reasons why:
1. The argument that regulators make is only valid when one believes the only benefit of an indexed annuity is when life insurance is included in a qualified plan. The costs of an indexed annuity have already been factored into the net cost of an indexed annuity and are disclosed when an income rider is included in the rollover of money from a qualified plan. So, there is no cost for the duplication of benefits.
Southwest Airlines, one of the few airlines to make money for its 401(k) participants in company stock the last 30 years, recently included an indexed annuity as a plan option because a traditional (k) plan investment cannot guarantee a family against loss or provide a lifetime income like a traditional plan. That’s why more and more safe money specialists and 401(k) rollover specialists are including indexed annuities in qualified plans.
2. A FINRA notice to members offers full disclosure updated by 408(b)-2, which requires that a death benefit be offered, that annuitization is available and that the annuity has fixed or guaranteed contract fees. A fixed index annuity provides all these benefits and more. The life insurance industry’s superior record on solvency versus pension plans is indisputable in good times and in bad. Many indexed annuities offer, subject to insurer solvency, a GMWB (guaranteed minimum withdrawal benefit), many more annuitization options, and enhanced death benefits.
In addition, some of these FIA benefits are indexed to inflation and provide a long-term care, home health care, chronic illness or even an unemployment rider which the 401(k) sponsors have been loath to provide.
3. “Price is only relevant in the absence of value." This is one of the reasons why the mutual fund industry is dying and the exchange traded fund industry and indexed annuities are thriving. With many leading publications like Kiplinger’s addressing that plan participants may spend hundreds of thousands of dollars in fees over a lifetime of saving, plan participants with full disclosure should be free to choose this value, especially when they find their (k) plan balance significantly underperforming market indices the last 15 years.
Each day, consumers make decisions on buying a Lexus versus a Prius or a Rolex versus a Timex. The race is on to find indexed funds and indexed annuities that provide value. After all, the good Lord put the first five letters in the word “broker” for a purpose.
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