What Might the SECURE Act Mean for Lifetime Income?
December 31, 2019 by John Manganaro
Among the many important provisions included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act is the establishment of legal protections for plan sponsors offering lifetime income products on their defined contribution (DC) plan menus.
Annuity Misconceptions Are Hard to Undue
Sheryl Moore, president and CEO of Moore Market Intelligence and Wink Inc., says participant’s hesitancy about annuities is in large part tied to the traditional media’s negative perception of annuities, which is itself tied to a lack of quality sourcing and the inherent challenge of conveying information about complex financial instruments in short pieces of content.
“As you know, the way stocks and mutual funds are sold on Wall Street works is that the sales person is either paid a flat fee or is paid an annual amount based on the assets, based on the AUM,” Moore says. “Annuities are different. The key difference is that most annuities are sold by commission, and the vast majority of annuities are paid one single commission at the time the product is sold.”
According to Moore, members of the public and financial professionals look at this simple fact about how compensation is organized and draw the false conclusion that annuities as a whole are not consumer friendly.
“A lot of registered investment advisers and broker/dealers take the position that annuities aren’t consumer friendly because they pay a commission of maybe 5%, while a mutual fund only takes 1% of AUM annually,” Moore says. “In reality, if you hold that mutual fund for 10 or 20 years, you will end up paying a lot more in fees to the mutual fund company than you would have paid as part of the initial 5% commission.”
Moore says there have been some attempts by the annuity industry to get around this problem, for example by trying to popularize trail commissions, where the salesperson gets a lesser amount or even $0 up front, but then they get an annual payment based on the account value of the contract for the life of the contract.
“This may be a better approach, but communicating this kind of information gets very technical, and again the media doesn’t really focus on these things,” Moore explains. “Many reporters are happy to hear from the stock and mutual fund salesmen, who talk about annuities not being consumer friendly relative to the stocks and mutual funds they sell.”