The Society of Annuity Facts and Education (SAFE) responds to “Why Indexed Annuities May Promise More Than They Deliver”
September 3, 2019 by Sheryl J. Moore
Dear Ms. Wang,
We appreciate you reaching-out to us last week, to ensure the accuracy of your reporting on annuities. The Society for Annuity Facts and Education (SAFE) is always interested in discussing the facts about annuities. That said, we found some errors in your article “Why Indexed Annuities May Promise More Than They Deliver,” and would like to clarify some misconceptions.
It is important to establish that annuities are insurance, not intended to perform favorably against investments. Insurance has a cost. For that reason, the performance of even variable annuities (which offer the greatest potential return of all annuity types) will not be similar to investments with no insurance component. Likewise, investments and insurance have different features. Therefore, it is disingenuous to compare annuities to investments; these products are not intended to address the same objectives.
The points we would like to make include:
- Those selling indexed annuities are not permitted by regulators to refer to the products as “investments,” or their purchasers as “investors.” As a result, it would behoove Consumer Reports to refer to indexed annuity purchasers appropriately in the future.
- The “investors bulletin” that you reference, issued by the Securities and Exchange Commission, actually describes structured annuities, not indexed annuities. We can understand how this would be confusing, given that the SEC is responsible for regulating structured annuities, and yet they are not able to differentiate them from indexed annuities. However, the aforementioned bulletin refers to features such as “buffers” and “shields,” as well as the suggesting that “investors may lose money;” these are all features of structured annuities. Indexed annuities do not have these features, and indexed annuity purchasers are never subjected to a loss in value as a result of market declines. While structured annuities share some similarities with indexed annuities, they are an investment; indexed annuities are insurance.
- Indexed annuities do not have fees, much less “high fees.” Some indexed annuities offer optional riders/benefits, which may carry charges of anywhere from 0.00% – 1.50% annually. However, only 38.8% of indexed annuity sales include such a rider1.
- While you suggest that indexed annuities “often fall short of their promised returns,” we find no basis for this statement. We clearly communicated to you during the fact-checking process that indexed annuities are intended to return 1% – 2% greater interest than fixed annuities being issued at the same time. This is how these products are positioned; salespeople are not suggesting that these products provide equity-like returns.
- Returns on indexed annuities do not “rise and fall with the stock market.” Indexed annuities cannot lose value as a result of changes in the stock market index.
- Your suggestion that “if the stock market posts strong gains, [the indexed annuity purchaser’s] return may be considerably less” is disingenuous. You fail to disclose that conversely, if the stock market experiences any loss, the indexed annuity purchaser’s values are protected from said losses.
- Indexed annuities generally do not pass the dividends of the index on to the purchaser because the purchaser is not directly invested in the index. Indexed annuities’ performance is merely based on the performance of the index, through the use of options.
- The participation rates, caps, and spread rates declared on indexed annuities are a function of option pricing, and the market’s performance above these rates is not retained by the issuing insurance company.
- The surrender charges on annuities are the feature that permits the insurance company to credit relatively-competitive rates on annuities. The bonds that insurance companies invest the annuitants’ premiums in have early redemption penalties. As such, the insurance company suffers a loss, should the annuitant need access to the annuity’s value, prior to the end of the annuity’s surrender charge term. In response, insurance companies have developed surrender charges, as a method of mitigating the risk of annuity purchaser’s needing access to more than the penalty-free withdrawal amount that they are permitted each year.
- Most annuities allow the purchaser to withdrawal at least 10% of their annuity’s value each year, without being subject to surrender penalties. Some allow withdrawals of as much as 50% of the annuity’s value, penalty-free.
- All annuities are insurance contracts, and prospective purchasers should read them, along with their product disclosures, prior to purchase. These documents specify (in a minimum font size, no less) the products’ features, including any surrender charges and limitations on indexed interest earnings; this is a far cry from being “hidden in the fine print.”
- Those selling annuities, relatively speaking, are paid a fraction of what those selling mutual funds are. On a ten-year annuity, the salesperson would receive an average commission of 5.91% at point-of-sale2. This is less than 0.60% annually over the annuity’s term, yet mutual funds typically pay the seller 1.00% annually.
- The elimination of the Fiduciary Rule is not responsible for the growth in indexed annuity sales; the low interest rate environment and market volatility have lent to the continued sales records of the product line.
Overall, we would caution you that the credibility of your sources on the topic of annuities is undermined by the fact that these individuals sell products that compete for the same dollars as annuities; asking CFPs and fee-based planners for information about annuities is akin to asking auto industry executives about bicycles.
We found it interesting that Consumer Reports is quick to suggest that their readers tap-into Social Security; the most widely-recognized annuity in this country. Yet, instead of taking the opportunity to educate your readers on annuities, you warn them against the products. We were under the impression that like SAFE, Consumer Reports was a nonprofit organization, dedicated to unbiased investigative journalism, consumer research, and public information? You do your readers a disservice with the misinformation in this article.
The #1 fear of Americans is running-out-of-money in retirement. Annuities are the only financial instrument that can guarantee the purchaser an income they cannot outlive. As a result, it would seem appropriate that annuities are strategically, and solely-positioned to properly address the concerns of our nation.
While a mixture of stocks and bonds may be appropriate for some, this combination will not solve the purchasers’ needs for a guaranteed paycheck for the rest of their lives. SAFE supports that idea that it is best to listen to each individual consumer’s concerns, needs, goals, and objectives, before suggesting products as a solution. No solution is omitted for consideration prior to such a discussion. This method ensures that each client’s purchase is truly what is in their best interests.
As with all financial products, we encourage consumers to do their research, understand all the terms and, based on their own circumstances, decide what is best for them. Whenever possible use a trusted financial adviser and understand their licenses, know their background and their experience.
Annuities are not right for everyone. And no one should put 100% of their assets into an annuity. However, annuities are a logical solution for many. Providing clear, accurate, and concise information about these products is imperative at a time that our nation is ultra-concerned about retirement income options. Your cooperation in this endeavor is so very appreciated.
Sheryl J. Moore
Chief Research Officer
The Society for Annuity Facts & Education
1 Wink’s Sales & Market Report, 1Q2019
2 Wink’s Sales & Market Report, 2Q2019
The Society for Annuity Facts and Education (SAFE) is a non-profit organization committed to educating consumers about annuities, and providing them with the information they need to consider whether an annuity is appropriate or not. For more information visit us at www.SAFEannuityeducation.org or call us at (800) 952-SAFE (7233).