American Annuity Advocates comments on Money Magazine article attacking fixed indexed annuities
By Steven Delaney
American Annuity Advocates
Editor’s note: This article is in response to “The Safety Trap” by Lisa Gibbs.
Dear Lisa Gibbs,
Financial products are not right or wrong, they are different, and they react differently to the forces at work in the markets. The impression I get when reading your article “The Safety Trap,” is that in the absence of any positive information about annuities, you believe that risk-based security products can serve every financial need of every American. Products should be viewed by their ability to meet the criteria of the client’s overall retirement and financial plan. That makes sense doesn’t it? So, the insurance industry brings safe savings products to a market to meet the needs of consumers with certain financial conditions, and these products bring unique attributes and benefits which securities simply do not, because they work differently. Securities are appropriate for those who can afford to take risks with discretionary assets. Unfortunately, people who lack a working understanding of financial products can find themselves a victim of malpractice. They may have a certain financial condition, yet the financial products prescribed to them do not have the capability to manage the condition, the need, or the problem.
Have you ever asked yourself what causes millions of people to choose annuities? Aversions. Fixed-indexed annuities help people overcome the aversions they have when it comes to their money, especially as we grow older, and our highest earning years are behind us. People have an aversion to a loss of principal or to taking risk. People have an aversion to outliving their assets, and running out of money in retirement. If you have any of these same aversions, you may discover that fixed-indexed annuities may be a much better option for you, your savings, your retirement and your heirs.
Many journalists working for the financial magazines, may not be able to see the forest through the trees. Maybe, in this “new normal,” journalists should take a step back to figure out how their roles must now change? The only thing constant is change, and as contemporary journalists, one cannot continue advancing broken theories like that of efficient markets, or that of 100 minus your age for stock and bond allocation within one’s portfolio as valid.
“The Safety Trap” is full of misinformation that will do harm to many, as it intentionally pushes consumers into the share markets. You strongly discourage consumers from utilizing annuities, suggesting that surrender penalties are onerous, both in duration and amount.
Life requires law and order, and in this regard, insurance companies design products to benefit both the company and the client — they do include surrender charges. The length of an annuity contract is a personal decision, and that is why folks can choose amongst various products. There are various reasons why a particular consumer may be perfectly comfortable with an annuity that has surrender charges which last for a period of five, six, or seven years, while another person may prefer the benefits of a 10, 12, or 16 year annuity. Annuity contracts with longer surrender charges credit higher interest rates, as the investments the insurance company makes and the contracts the insurance company offers to the public must align in duration. Personal decisions regarding benefits and personal time horizons need to be made. The point is, annuities are not for buckets of money that must remain completely liquid. Instead, you must be willing to abide by the annuity contract — which includes surrender charges — if you seek the benefits annuities offer, which I believe more and more people will seek.
Additionally, you must consider the point made by the insurance industry that surrender charges are actually a good thing for various reasons. They allow 100 percent of a consumer’s deposit to go to work earning interest immediately. A product with a front-end sales charge (which fixed, fixed-indexed and income annuities do not utilize) reduces the amount of the deposit up front to cover the sales commission, and therefore, less money is working for the consumer from day one.
Consider the practicality, in that surrender charges encourage the consumer’s money to stay with the insurance company longer, which allows a carrier to invest longer (at higher rates) and provide higher returns. Surrender charges also discourage the consumer from withdrawing from their account early for non-critical needs, so the money is actually there when they need it the most.
You state that premium and/or vesting bonuses provide no real value to consumers. Perhaps choosing a product with a premium bonus of 5 percent or 10 percent would help a consumer offset a loss suffered in a market sensitive investment; or produce a certain amount of guaranteed income one may need or simply desire in order to shore up their retirement. Also, a bonus of the premium or vesting sort will affect guaranteed income benefits. For example, you have a premium bonus, and the individual contemplating an annuity is interested in having a guaranteed income stream in retirement. An income rider is available, producing an income base growing by X percent a year — say, somewhere between 5 percent and 8 percent — and the coordinating withdrawal rate based upon attained age X is a constant — between 4 percent and 8 percent. Will the guaranteed future income a senior will, or could, receive be greater than an income stream that did not include a premium bonus? All things being equal, the answer is yes.
You also state that fixed-indexed annuities are complex. First, the fixed indexed annuity with an annual reset crediting method is a simple product. If the S&P 500 index moves in a positive direction by 10 percent on an annual, point-to-point basis, comparing day one with day 365, and you had 100 percent participation with a 6 percent cap, you would be credited with a 6 percent interest credit to your account value. If the S&P 500 index moves in a positive direction by 18 percent, you would again receive 6 percent on your account. If the S&P 500, to which the majority of FIAs are linked, were to fall 38 percent, the FIA credits a wonderful number — zero. If the stock market declines by 38 percent like it did in 2008, and you were invested in the stock market by means of owning stocks, bonds, mutual funds or variable annuities, and you had fees/cost totaling 3 percent, the stock market would need to increase by 72.49 percent (accounting for your fees), to bring you back to where your account value stood before that 38 percent decline. Think about that. Do investors and seniors understand that?
You speak of the FIA performance being inferior to a portfolio consisting of 85 percent bank CDs and 15 percent in an S&P 500 index. You really should not be comparing investments to savings products in terms of performance, as they are completely different products. The strategy you and your experts cite is one market-oriented advisers often suggest, and it involves dividing your money into two buckets. The first is used to purchase CDs, which will provide the consumer a guaranteed future value (as original deposit plus interest grows back to your original premium), and the second bucket, consisting of a 15 percent allocation in an S&P 500 index fund, is used in hopes of capturing stock market gains. Additionally, if you should need access to some, or all, of the money invested in the market index, you have no idea what the values will be when they may be most needed.
Consider that this 85 percent CD/15 percent index fund strategy cannot protect the entire principal, cannot lock-in annual gains, and cannot provide the highest possible guaranteed income. In terms of liquidity, the options available with the fixed-indexed annuity are factually more extensive and flexible: a free 10 percent withdrawal feature, annuitization options and guaranteed income riders. And don’t forget about the protected aspect of an FIA’s liquidity — all principal is protected, and as interest gains are locked in annually, they, too, are protected
In terms of liquidity, the ability to preserve your nest egg, either for your own use or for your heirs/beneficiaries, is a key point. We say this because with a fixed-indexed annuity, you do not subject your nest egg to the roller coaster of the stock market, and you don’t have the high costs/fees. Your FIA is not susceptible to reverse dollar cost averaging, as are market sensitive investments, which mathematically results in the cannibalization of account values in market sensitive investments.
“The FIA performance is inadequate because the caps are low and can change every year, and because they exclude the dividend yield.”
You make the same old dividend claim, failing to give proper consideration to tradeoffs that many annuity buyers find extremely worthwhile. The tradeoffs and positive attributes of the annuity never seem to have entered your decision making process. Additionally, caps change because they are a function of volatility and changes in interest rates, and some would say supply and demand, as well. You are comparing apples and oranges, which is always a problem. Consider that neither you nor your peers can find a financial product on the spectrum of risk and return that provides stock market returns, including dividends, and credits zero when the stock market has a down year. Such a product does not exist because the financial gurus only have so many variables to play with when you throw in these variables such as guaranteed income; credits zero in years of negative market performance; and resets to new lower numerical index value when the S&P 500 ends at a lower index value than it started with at the beginning of the year. Do you know what you get when you throw that protection into the mix? Moderation. You get no dividends with an FIA because you do not own the stock. Your account value is protected; it does not lose value when the stock market goes down because you do not own the stock.
You state that the built-in lifetime income feature is inferior to an immediate annuity, and that a consumer’s portfolio could be turned into an immediate annuity. Since people don’t have a crystal ball, they don’t know exactly when they will be retiring, and when they will need retirement income. So an immediate income annuity is a good idea in and of itself, but its ability to deliver the amount of guaranteed income one desires is limited by the premium that funds the purchase of the income stream. A SPIA may provide more lifetime income, depending upon the scenario, if we are talking about immediately annuitizing a sum of money. But it would dissolve the premium, and one would own an income stream versus an account value.
However, using a longer time horizon, a longer deferral period, and allowing the income base to grow by a compounding interest rate gives a consumer the opportunity for more guaranteed income, because the income base is guaranteed to grow to a certain value. This results in a greater guaranteed income account value, which provides greater guaranteed income. And, the client still has control of their money, their asset.
People choose an annuity for the safety and protection. So the people who choose annuities are choosing a different asset class altogether. These folks don’t want market sensitive investments. They do not want the ups and downs or the volatility of the stock market, at least for a particular sum of money. Thus, annuity buyers may not even be considering the asset classes you advocate, (mutual funds, variable annuities, stocks, bonds) because those products have no protected value.
If safety is the primary reason, the second reason people choose an annuity is the ability to receive guaranteed lifetime income of a protected value at some time in the future. So they get the protection they are seeking, and then, when they are ready, they exercise their guaranteed income. They won’t be crossing their fingers as they approach retirement for fear of entering retirement with a market sensitive investment portfolio in a down market, and then find themselves annuitizing a portfolio which lost significant value. “FIAs are sold in a deceptive manner.”
As fixed indexed annuities have become more popular, insurance regulators and insurance carriers have increased the effort they put into ensuring that consumers understand the financial products they are considering. Agents must be attentive to a suitability review on each and every sale, and this is a good thing that everyone in the industry understands. Demand for the FIAs continues to grow, so insurance companies are doing everything they can to institute appropriate suitability constraints and a process that results in satisfied customers.
“FIAs pay unusually high commissions to sales agents that lead to abuses in the sales process.”
As I said to another journalist recently, the bottom line is this: Everyone should be aware that financial products pay commissions or fees to the adviser, whether they are a fee-only planner, registered rep, broker, etc. Some pay 1 percent as a management fee on account balances to the adviser each and every year, but the consumer is also paying other costs relative to the particular investment vehicle (mutual fund, ETF, REIT, etc.). Annuity commissions may be paid up front, meaning only once, regardless of how long the annuity is held.
“FIAs are inadequately regulated by state insurance regulators.”
State insurance departments’ standards for determining suitability are quite complete, and if a state insurance department believes there have been abuses resulting from commission‐driven sales, the agent and the insurance company will feel their wrath through fines or license suspension.
To say that Sen. Tom Harkin’s amendment to the financial reform bill was slipped in at the last minute, and to imply that there was sneaky foul play involved, is shameful. The Harkin amendment was the result of collective critical thinking and common sense. This amendment protects our citizens and our industry against the imperialism of the securities industry. As I have stated numerous times, the fixed-Indexed annuity uniquely protects policy holders. It is the only financial/insurance product that can guarantee Americans an income they cannot outlive, while still providing a minimum guarantee and sheltering their life savings from the ups and downs of the stock market. Thus, Sen. Harkin’s amendment was attached to the financial reform bill for very sound reasons. I would mention that it was added to the financial reform bill after a senator used a parliamentary tool to kill floor debate on the amendment.
In summary, it appears you simply wanted to tell a particular story; one that serves a particular agenda. However, your story has the potential to hurt the very people you want to protect, such as the retirees in your article. What a shame.