Response: For Now, SEC Shifts Gaze From Indexed Annuities
January 3, 2010 by Sarah Morgan
ORIGINAL ARTICLE CAN BE FOUND AT: For Now, SEC Shifts Gaze From Indexed Annuities
Dear Ms. Morgan:
I am an independent market research analyst who specializes exclusively in the indexed annuity and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I used to provide similar services for fixed and variable products, but I believe so strongly in the value proposition of indexed products that I started my own company focusing on IAs exclusively. I do not endorse any company or financial product, and millions look to us for accurate, unbiased information on the insurance market. In fact, we are the firm that regulators look to, and work with, when needing assistance with these products.
I recently had the occasion to read your article, “For Now, SEC Shifts Gaze From Indexed Annuities,” which was published in SmartMoney. I noticed a couple of inaccuracies and misleading statements in the article, and wanted to reach out to assist you with them.
First, indexed annuities are not an investment. They are fixed insurance products. “Risk money products” such as variable annuities, stocks, and bonds are investments. “Safe money products” such as fixed annuities and indexed annuities are insurance.
Although your source Bryan Place indicates that “investors often do not understand that the products they’re buying carry a cap on the returns they’ll see,” the insurance industry is VERY diligent in promoting indexed annuities to provide limited gains tied to the performance of a stock market index. Although he is correct that the indexed annuity purchaser could receive as little as 4% interest (in fact they could receive as low as 0%), the indexed annuity purchaser is also protected from declines in the index. So, when the market declined nearly 50% over the one-year period from March 2008 to March 2009, indexed annuity purchasers did not lose a single penny of their money because of the market downturn. I would contest that this is a value proposition that most Americans wish their retirement product had offered over that same period.
Regardless of Mr. Place’s statement that caps “create a two-tailed risk,” they do not. Indexed annuities, whether they have a cap or not, are intended to return 1% – 2% greater interest than a fixed annuity is offering today. So, if fixed annuities are offering 4% interest today, an indexed annuity will likely return 5% – 6% to the annuitant over the lifetime of product. Certainly, some years the client will receive 0% interest, and other years they will in fact earn double-digit gains. However, indexed annuities are not priced to compete against risk money products such as stocks and bonds. Because of the expense of the minimum guarantee and the floor that these products offer, they are comparably priced to products such as fixed annuities and Certificates of Deposit (CDs). Indeed, indexed annuities DO provide a very efficient hedge against volatility in the market by providing a guaranteed minimum floor of no less than 0% interest crediting.
Also alarming was Mr. William Reichenstein’s statement that indexed annuities “tend to be relatively high-cost products.” What it he trying to allude with this statement- that these products have high surrender charges? They do not have fees at all, so that cannot be it. However, if this is regarding surrender charges, indexed annuities are available with surrender charges as short as one year. In addition, all indexed annuity purchasers are given access to 10% of their annuity’s value, annually, without being subject to surrender penalties (some products even allow as much as 20% to be taken annually). In addition, 9 out of 10 indexed annuities provide a waiver of the surrender charges, should the annuitant need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact these products pay the full account value to the beneficiary upon death, and I think you would have difficulty implying that these products are high-cost.
To provide you with clarification on the commissions these products are paying, the average street level commission on indexed annuities as of 4Q2009 was 6.47%. Compare this to the consistent, generous commissions that are paid annually on mutual funds and like products, and I think you’ll agree that indexed annuity commissions are quite reasonable.
Your sources may feel that “consumers could benefit from more disclosure about the terms and risks of these products” if Rule 151A goes through. However, they appear to be ignorant of the existing regulation that is in place for indexed annuities today. Indexed annuities are regulated by the 50 state insurance divisions of the United States. These insurance commissioners regulate indexed annuities with rigorous standard non-forfeiture laws (SNFL), advertising guidelines, suitability regulations, and other rules. The states hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines. An interesting comparison of state and federal regulation exists relative to annuity complaints specifically. If I need to make a complaint on an indexed annuity, the state insurance division has to respond to me within ten days; and I incur no cost in my efforts to resolve the problem. Compare this with the exhaustive complaint process on the securities side; delays, lawyers, and a lot of my money spent. Yes, SEC regulation is different, but it most definitely is not better.
One of your sources indicates that if 151A goes through, insurance commissions are the SEC will regulate indexed annuities and that effectively “you’ve got two sets of eyes looking at the product.” Although this would be true, it does not necessarily mean it is better. Unnecessary, duplicative regulation will result in increased costs to the insurance companies selling these products. These increased costs, in turn, will be passed on to the indexed annuity purchaser. In addition, if you take a look at the National Association of Insurance Commissioner’s (NAICs) Closed Complaint Database, you’ll see a startling difference between the complaints on products regulated by insurance commissioners and those regulated by the SEC:
■ In 2007, indexed annuity complaints averaged 4.1 per company (in comparison, variable annuity complaints averaged 5.9 per company)
■ In 2008, indexed annuity complaints averaged 3.8 per company (in comparison, variable annuity complaints averaged 7.1 per company)
So, not only have indexed annuity complaints declined, but variable annuity complaints are rising! In addition, indexed annuity complaints are far fewer than the complaints on products that the SEC is already regulating! This certainly gives pause to the concept of the SEC’s current level of regulation on annuities.
In closing, it is alarming to see the slanted sources that you have used for this article on an important insurance product. Today more than ever, Americans are looking for reliable sources to inform them on how to keep their retirement dollars safe. It is distressing to see that a publication as highly-regarded as SmartMoney would not seek out sources that are unbiased and neutral on this topic. Should you have a need for such a source, who can provide FACTUAL information on indexed annuities in the future, please do not hesitate to reach out to us.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax