AnnuityAdvisors - Where advisors go for advice

August 17, 2006

To: Tom Lauricella, WSJ

From: Michael Tripses, NAFA Chair

RE: “Yikes, Here Come The Retirement Raiders”

NAFA appreciates your efforts to inform consumers, particularly those nearing retirement. We generally agree with your advice that consumers:

These truisms are, of course, good advice for any consumer purchase, and especially for financial products. However, your mélange of quotes are conflicting or misleading and leave a reader with a list of don’ts but very little idea of what to DO.

The don’ts include:

The do’s include:

We strongly disagree that indexed annuities are a “siren song”. Of course, NAFA strongly supports actions taken by the insurance companies and state insurance regulators to prevent misleading or unsuitable sales by agents. However, the newest versions of fixed annuities which have indexed interest strategies do offer is a way for a client to “sculpt” their retirement assets to suit very specific risk/reward/income/liquidity profile. These indexed interest strategies in fixed annuities developed over the last 10 years offer a potentially higher interest rate than fixed annuity rates, along with much more preservation of principal and interest than equities and other securities. They are some of the most liquid, tax-advantaged products around thanks to competitiongenerated creativity and strong state non-forfeiture laws.

What is most suitable for any individual is dependent on their income needs and timing, tax situation, other assets, estate considerations, propensity for risk, and ability to understand and have comfort with financial products. These are not easy decisions, which is why a competent insurance agent is required.

Your publication of Mr. Wenzel’s conclusion that apparently most of his assets during retirement will be in exchange traded funds cannot be good advice for most of your readers. The Enron example you gave is a perfect indictment of that approach for all but the most adventuresome of seniors who wish to roll the dice and hope to hit 7 or 11.

In an exchange-trade stock fund, perhaps the individual will earn a compound annual growth rate (CAGR) of, say, 9% for the next 10 years before taxes, but of course, it could be better or much worse including big losses if we have an extended bear market. This would violate the very lesson of the Enron example which is do not expose a large portion of your assets to losses when you are using them for income. There are fixed annuity products today with capability (using index interest strategies) for a CAGR in the 6% range. Of course it could be lower or higher, but no less than 2-3%. Fixed rates in annuities today are in the mid 3% or perhaps 4% range with almost no volatility. Isn’t this about what you’d expect a fixed, principal-protected index annuity to do – to live between the two extremes? Shouldn’t many seniors consider the fixed annuity using indexing strategies for some of their retirement assets? In addition, compared to other non-insurance securities, fixed annuities offer deferred taxation, no prior principal or earnings losses if the market goes down in a given year, no fees which can eat into savings, low volatility, and guaranteed minimums with preferred tax treatment again at payout. A 6% CAGR might be a reasonable trade off especially because Dalbar studies show consumers often try to time the market - getting in and out at the wrong time and risking their savings.

The main thing to know is whether income needs are imminent. We’d be disappointed if some readers took anything in your article to suggest that they should have ALL of their retirement funds in stocks!! A better plan is usually to allocate retirement assets among products with different features, benefits and tradeoffs.

NAFA believes that there are many financial and lifestyle choices to consider when purchasing any financial product and when choosing an annuity product. No one insurance, savings, or investment product is right for all people, all of the time. The advantage of a competitive free market system is that more choices allow customers to target specific needs and meet specific goals. Part of our mission is to get consumers good information about where fixed annuities fit in the pantheon of financial products so they can make the best choices for themselves.


Michael Tripses

NAFA Chair


July 30, 2006

People approaching retirement with a bundle of money face a daunting task: Dealing with the armies of financial advisers who want to help them handle that nest egg. After a lifetime of getting regular  paychecks, it's certainly scary to know that your retirement savings must provide enough money to live on for 20 or 30 years, or even longer. So it's not surprising if your instinct is to seize upon fresh advice and make big changes in your investments. Instead, take your time. You've got plenty. Even savvy investors can find themselves grappling with pitches for complicated products they don't fully understand. By saying 'yes' in such cases, you can end up doing more harm than good. Michael Wenzel, a former software engineer now 59 years old, talked to several advisers last summer, when he weighed accepting an early-retirement package. He was intrigued by one pitch for an investment offering "guaranteed income for life," and returns tied to stocks but without stock-market risk, so he could "sleep well at night." This kind of investment, an equity index annuity, was also suggested by two other advisers. "A Siren Song" On further research -- and despite having traded stocks, bonds and even options in his investment accounts over the years -- Mr. Wenzel was taken aback by the products' complications. Ultimately, Mr. Wenzel decided the index annuities "were a siren song" that seemed to offer what retirees crave but that came with too many caveats and fees that would eat into his savings. Instead, a portion of his savings went into broadly diversified low-cost exchange-traded stock funds, in a portfolio managed by an adviser paid a flat hourly fee. Among the lessons here for other retirees: While complicated products, including many types of annuities, work well for some people, you can also decide to just say no. If you roll money from your 401(k) at work into an individual retirement account, as many people do, you might initially invest in similar securities, such as a mix of stock and bond mutual funds. Understand how much an adviser is being paid and by whom; if commissions aren't deducted directly from your account, that adviser may be being paid through fees within your investments which reduce your returns. "I see a lot of emotional plays being made to folks" who are about to retire, says Allan Roth, a Colorado Springs, Colo., financial adviser who is now managing some of Mr. Wenzel's money. While the fear of running out of money during retirement can be a legitimate concern, Mr. Roth says, the question is "are those emotions being used to sell them something that will solve that concern -- or make it worse." He suggests getting an adviser to explain in writing why an investment or strategy is suitable for you -- backed up by hard data.

When it comes to retirement planning, missteps can be dire. That was the case for a group of 32 former Exxon Mobil employees who received advice from David McFadden, a broker with Securities America, a unit of Ameriprise Financial. Mr. McFadden advised most of the 32 that they had enough money to retire early. He pledged a financial plan that would allow them to "sleep at night" and said their "heirs will be fighting over all the money," according a complaint they brought against Mr. McFadden and Securities America. The Reality Got Ugly Instead, some of the Exxon Mobil retirees, who live mainly in Baton Rouge, La., found themselves having to sell their homes and go back to work after the stock market collapsed. Among other allegations, the group said they were directed to inappropriate investment selections within high-fee annuities that paid Mr. McFadden lucrative commissions -- and were advised to withdraw far more from their retirement accounts each year than most experts say is prudent. In May, a National Association of Securities Dealers arbitration panel awarded the former Exxon Mobil employees $22 million, one of the largest awards of its kind. Securities America and Mr. McFadden are challenging the decision. With complicated products, even people who think they know what they are doing can make mistakes. Take immediate annuities, which are insurance offerings in which a lump-sum investment is converted to a guaranteed stream of payouts. Kathleen Piaggesi, a Scarsdale, N.Y., financial planner, says some investors are attracted to the idea of getting their payouts over a precise period -- such as 10 years - - because the individual checks are bigger than if they signed up for an annuity that paid them for life. But by taking an annuity with a fixed payout period, the investor is defeating the main benefit: never outliving the income, says Ms. Piaggesi. For that reason, she prefers what is known as a "joint and survivor" option, in which annuity payments continue to be made to the survivor when one spouse dies. Another misstep retirees make with annuities is paying too much attention to the juicy monthly payments and not investigating whether those payments will be adjusted for inflation, says Scott Dauenhauer, a financial planner in Laguna Hills, Calif. A fixed payment "is guaranteed to buy you less and less for the rest of your life," he notes, so it's crucial for annuity buyers to also have other investments working to keep up with inflation. Dig Into the Details It's vital for investors to be sure they understand the inner workings of a complex investment. In the case of the equity index annuities that retired engineer Mr. Wenzel considered, the Web site of Arizona insurance broker David T. Phillips advertises "unlimited" potential gains. But index annuities often have an "index cap rate" that limits the return an investor can earn even if stock prices soar. In an interview, Mr. Phillips acknowledged that in cases where there were index caps, there was not "unlimited" potential for gains. He says his clients who invested in index annuities roughly 10 or 11 years ago have earned about 7% a year. (By comparison, the Standard & Poor's 500-stock index has returned 11.4% a year since the start of 1995.) There are other potential restrictions with these annuities, such as requirements that investors hold the annuities for long periods of time or else face withdrawal charges. Mr. Phillips's company sold one that charged a withdrawal fee unless an investor held the annuity for 15 years. That fee started at 19% of the amount withdrawn and declined to 5%. The withdrawal-fee details were provided in footnotes to a marketing brochure.


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NAFA is the National Association for Fixed Annuities. NAFA was created to foster a better understanding of traditional, payout and indexed annuities. It is the only independent, non-profit organization dedicated solely to the promotion and preservation of these unique products. Permission to distribute and/or reproduce this document for NAFA members may be given upon request. Any unauthorized distribution is strictly prohibited.

Last Updated: 8/21/2006 2:26:00 PM