September 18, 2006
To: Jack Naudi
From: Kim O’Brien, Executive Director, NAFA
RE: Equity indexed annuities are still a bad idea
ST. LOUIS POST-DISPATCH
Sunday, Sep. 03 2006
NAFA is always pleased when journalists write about fixed annuities to help inform and educate the public. Unfortunately when the writing is limited to what a product isnot and what it does not do, NAFA is compelled to provide information that will help your readers understand what these products are and what they are intended to do. NAFA believes that in a market economy consumers should have choice and that means providing them with accurate, balanced information. The public interest is not served by eliminating choice or just informing the public of what a product is NOT, but by providing all the facts about all products.
You state that indexed annuities are not:
1. Good investment vehicles
2. The same as index mutual funds
3. The only low-risk choice
4. The best or cheapest alternative
You are correct on all counts. But, your readers deserved to be informed aboutwhat they are and what they do provide.
Fixed annuities, including indexed annuities, are excellent principal-protected, insurance for many people. Fixed annuities are insurance contracts thatprovide guarantees of principal, interest, payout options, as well as more liquidity than many other financial products. How many investments or other financial products allow you to take principal and interest earned upon death, nursing home confinement, terminal illness, election of a lifetime income or upon a simple request for 10% of proceeds each year – regardless of whether the stock market was up or down that year? These liquidity features offer the owner peace of mind and income when it is needed.
They are not like an indexed mutual fund primarily because you cannot lose any of your principal or prior interest during a market downturn like you can with indexed mutual funds. Many mutual funds have exit charges as well. Even those that do not have explicit charges do not give the owner an explicit“guaranteed selling price” and in fact have the potential for complete loss of investment. Charges are the least of your worries when your entire principal is at risk. Indexed mutual funds are appropriate for long-term, risk-accepting money, not medium-term, risk averse money. By your logic, you would also condemn bank-CDs as well, suggesting most of your readers investments be placed at risk; surely, foolhardy advice.
Mutual funds arenot low-risk choices, They do not provide protection from asset loss at death, especially in a market downturn? Where is the emergency partial liquidation feature without loss of value? More importantly you acknowledge that there are people who are ill-equipped to watch the values of a market-exposed approach decline 20% during an interest rate rise or equity decline and not feel forced to make the bad economic decision of selling and realizing the loss. The reason people of all ages and lifestyles choose a fixed annuity is for the minimum guaranteed interest rate, excess interest (declared or indexed), no loss of principal or interest previously credited and availability of an income you can’t outlive and tax-deferral.
You say these products have, “fat, largely hidden, commissions that range from 5 to 12 percent.” You are incorrect and misleading your readers. Commissions range from1% to 12%, but a recently published study of all products sold in 2005 shows that less than 3.5% of all indexed annuities sold in 2005 paid over 10% commissions and almost 60% were less than 7%. If one compares asset fees of 1% or more of asset value charged each and every year for a mutual fund or an asset wrap account over the duration of a financial plan against the 5% to 10% commission paid ONCE to the agent, a more realistic conclusion might be that the playing field of fees and commissions is remarkably level.
The issue of the objectivity or bias of fee-based financial advisers versus commission-based agents is really irrelevant to your discussion of fixed indexed annuities. This is a matter ofhow these products are distributed, not what the products DO or DON”T DO. In fact, most securities and insurance products are distributed in both ways. Recently, “trail commission” options are proliferating in fixed annuities and it has always been the case that a fee based adviser can waive fees on any of these products within a managed account.
Both investment and insurance professionals must hold an insurance license to sell fixed annuities. Fixed annuities are heavily regulated by state insurance departments which enforce statutory reserve guidelines, minimum non-forfeiture laws, insurance company investment laws, GAAP reporting standards, and Actuarial Guideline 35. The marketing and sales of fixed annuities are also highly regulated by state insurance laws, including comprehensive insurance trade practices provisions covering misleading presentations, false advertising, full disclosure, etc. Most importantly, insurers arevoluntarily requiring their agents and brokers in all states, to follow suitability standards. These regulatory and voluntary requirements are good for the customer and good for business.
This article, eerily similar to the articles in the national press, seems to leave your readers with an “Annuities–bad/Investments-good” conclusion and we think your readers would be better served by receiving more objective and balanced information rather than being warned to shun a product which is appropriate forsome money for many of them, especially those needing distribution in the near future.
Declared rate and indexed fixed annuities are responsible for protecting billions of dollars worth of retirement assets and have saved many a contract owner from losses in riskier vehicles. The benefits of fixed annuities fulfill the conservative promises of safety and minimum guarantees for which many people are looking. In fact, fixed annuities can be the ideal foundation for a sound retirement portfolio. NAFA believes that there are many financial and lifestyle choices to consider when purchasing any financial product and when choosing an annuity product. No one insurance, savings, or investment product is right for all people, all of the time. The advantage of a competitive and evolving market in annuities is that many choices are available to consumers, allowing them to target their specific needs and meet their specific goals.
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NAFA is the National Association for Fixed Annuities. NAFA was created to foster a better understanding of traditional, payout and indexed annuities. It is the only independent non-profit organization dedicated solely to the promotion and preservation of these unique products.
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