With all of the conversation and confusion over annuities, advisors may find it hard to introduce these options to their clients. The new statistics from USAA indicating that the overwhelming majority of Americans want to enhance their feelings of security through predictable income may help advisors broach this topic. In fact, some advisors may find that simply sharing the survey results can help initiate that conversation.
New statistics show that an overwhelming majority of adult American believe it is more important to a retirement plan that has guaranteed monthly income as a component than to reach a specific goal. Yet, a high number of Americans also do not know the basics of annuities. A poll by USAA found that 58% of adults understand that annuities are retirement savings products, but 42% of them do not understand the details of annuities. If you are searching for answers to this knowledge gap, don’t look to advisors. Results from a study released by the Harris Poll in August 2023 showed that advisors are twice as likely (80% to 40%) to include annuities as asset protection and diversification tools over EFTs. What then is the holdup? In a word: fees.
According to the annuity research center run by Morningstar, the fees associated with variable annuities can range widely. They calculated the industry average at 1.04%. As with most service-based costs, fees for annuities increase as risk and complexity increase. While those basics seem neither controversial nor inflammatory, the ire for annuities grows when investment regulators and experts move on to more specific kinds of annuities. In October of 2023, some groups of experts aimed a stream of concern (to put it mildly) at Fixed Index Annuities (FIA). According to Jeffrey Acheson and Brian Graff, both of the American Retirement Association, the Economic Council of Advisors via a now removed blog post inferred that “the suitability of a specific annuity product type in Fixed Index Annuities (FIAs) was questionable and by inference, impugn the reputation of a specific insurance company and its product.”[1] This came on the heels of the DOL’s proposed new retirement security rule. The DOL’s proposed rule seems to intimate that advisors that recommend rolling 401(k) accounts to annuities related to an advisor’s institution is not one a fiduciary should make. “Amounts held in workplace retirement accounts often represent the largest savings an individual has, and financial services providers often have a strong economic incentive to recommend that investors roll money into one of their institutions' IRAs or annuities. Applying the ERISA fiduciary standard in these transactions will provide significant protections for retirement investors.”[2]
This back and forth among investment experts may seem kvetching, but the impact of high-level discussions like this, played out in a public sphere, affects how clients view annuities. In short, it dissuades and confuses some investors, often the ones who would most benefit from adding them to their portfolios, from investing in annuities. The concerns about FIAs in this public sniping centered on fees. As FIAs are more complex, one would expect the fees to be higher than other investment products.”[3]
Annuities provide investors the “sense of security that you need to survive a volatile market: predictable income.”[4] The basics of an investment portfolio are appropriate diversification, emergency funds, and estate plans. Estate planning, arguably, may offer a sense of security towards providing for family, but they lack the central defining feature of annuities: predictable income they cannot outlive. In the market of late, annuities also offer security since they can cushion a portfolio from market volatility, something investors with less time before retirement may need.
Investors may be particularly confused about the online sparring over annuities since as an investment product they tend to have more variety than other products. A 401(k) only has so many iterations, whereas there are eight iterations of annuities, and then additional subtypes within those different classes.
One of the main concerns with annuities may be the confusion between types of annuities that sound similar. The so called “junk fees”[5] that caught the Council of Economic Advisors’ eye were FIA – Fixed IndexAnnuities. One of the more commonly recommended annuities for general investors is the Fixed IncomeAnnuity. Unlike a setup for Threes Company, confusing these two similar sounding phrases will not ensure that hilarity will ensue.
Since clients may confuse these two kinds of annuities, advisors may want to get ahead of that confusion by addressing how fixed index annuities differ from fixed income annuities. Fixed Income Annuities provide a steady stream of income without market volatility – the payout to the investor is fixed. Fixed Index Annuities, on the other hand, fix their return to a specific market index, such as the Dow Jones Industrial Average or the Russell 1000. Other kinds of indexed annuities exist, like the registered index linked annuity also called the buffer annuity. Returns on this kind of annuity are linked to change in a market index, as a way to blot the highs and lows of an indexed annuity.[6]
With all of the conversation and confusion over annuities, advisors may find it hard to introduce these options to their clients. The new statistics from USAA indicating that the overwhelming majority of Americans want to enhance their feelings of security through predictable income may help advisors broach this topic. In fact, some advisors may find that simply sharing the survey results can help initiate that conversation.
[1] https://www.napa-net.org/news-info/daily-news/defense-fixed-indexed-annuities
[3] https://www.napa-net.org/news-info/daily-news/defense-fixed-indexed-annuities
[4] https://www.fidelity.com/learning-center/wealth-management-insights/market-volatility-and-annuities#
[6] https://www.fidelity.com/viewpoints/retirement/buffer-annuities
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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