The Department of Labor announced the other day that it was delaying the effectiveness of certain part of their new fiduciary rule for 60 days. This delay was essentially requested by the Trump administration in order to evaluate the fairness of the DOL’s new fiduciary rule, a rule which simply requires that any financial adviser that provided advice to pension plans, such as 401(k) and 403(b), always act and provide investment advice that is in the customer’s/client’s best interests. While that does not seem to be particularly onerous or unfair, the investment industry thinks otherwise.
There are those, myself included, that believe that major reason for the investment/ financial services objection to the DOL’s fiduciary rule is that it effectively prevents them from recommending that retirees invest in variable annuities, which are often labeled as inherent unfair due to excessive fees, fees which can easily reduce an investor’s end return by over 50 percent. And guess who gets that 50 percent or more taken from variable annuities investors? The insurance company that sold the variable annuity to the investor.
There is a saying in the financial services industry – “annuities are sold, not bought.” And there are various reasons besides the excessive fees why the statement is true. Variable annuity salesmen and variable annuity ads often try to lure investors to purchase a variable annuity for the tax deferred growth it offers. But IRAs offer tax-deferred growth at a much lower cost.
Another tactic used by variable annuity salesmen, insurance companies and variable annuity ads is the “guaranteed lifetime income” and “you’ll never run out of money” spiels. What they do not explain is that to receive that guaranteed lifetime income, the owner of the variable annuity has to give up control of the money in the variable annuity to the insurance company that sold the investor the variable annuity.
Once the variable annuity owner opts to exercise the lifetime income guarantee, known as “annuitizing” the variable annuity, the variable annuity owner’s control over the money in the variable is gone forever. Even if the variable annuity owner were to die the day after annuitizing the variable annuity, the balance in the variable annuity belongs to the insurance company. That is why estate planning attorneys will tell clients that variable annuities can destroy their estate plans, as the funds that were going to help carry out the plan’s goals and wishes will be gone if the variable annuity owner annuitized the variable annuity.
As investors have learned about the issues with variable annuities, insurance companies and the financial services industrys have shifted their sales efforts to fixed indexed annuities. The marketing spiel here is that rather than the low-interest rates on regular fixed annuities and CD’s, the fixed indexed annuity provides investors with the opportunity to earn the higher returns of the stock market, as measured by a stock market index such as the S&P 500.
What the salesmen and insurance companies that peddle these investments do not explain is that fixed indexed annuities usually contain various restrictions that severely restrict an owner’s ability to receive much more than 7-8 percent a year, regardless of the stock market’s actual performance. While it is true that most fixed indexed annuities contain provisions that prevent the owner from ever suffering a loss if the market is down, there is a cost for such guarantees.
The newly announced delay in the DOL’s fiduciary rule also relaxed the rule requiring that those peddling variable annuities and fixed indexed annuities had to disclose any and all conflicts of interest they may have in selling such products, such as the significant commissions they receive from selling such products, usually in the range of 6-7 percent, sometimes even higher. Guess who’s actually paying for that commission? Right.
First, you have the annual fees charged by insurance companies in connection with such products. Say you eventually realize how bad the product actually is and to get out of, or surrender, the product. The insurance companies impose back-end fees, or surrender charges, if you try to get out of the product before they have recovered the cost of those commissions.
Some insurance companies use sliding scale surrender charges that are reduced each year, usually be 1 percent a year. The most common period for such sliding scale surrender charges is seven years. Other insurance companies charge the same surrender fee over a term of years. I have actually seen annuities with a consistent surrender charge over a term of 15 years!
If you currently own, or are considering purchasing, a variable annuity or fixed indexed annuity, sometimes referred to equity indexed annuities, please read our white paper, “Variable Annuities-Reading Between the Marketing Lines”, available here.
This article is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought