Indexed annuities can be good as well. I work for an agency that charges no fees at all because the Insurance company pays the commission.

If someone is looking for a place to put an IRA or 401(k), indexed annuities can be great (depending on what it is, of course). We only work with the ones that don’t go lower than 100% participation, no fees, and many offer bonuses (depending what time period works for a person).

It is unfortunate that people are convinced to purchase poor annuities simply because there are dishonest agents out there - it gives the rest of us a really bad name, especially on a product that can really, really help some people.

Gordon H. in Phoenix, thank you for your comments. Can you please share the name of your high-cost, actively managed fund with the rest of us? I would like to take a look at it. I’m a long term investor, and 3 years sounds like an awfully short time frame to me. How does your fund compare against no-load, low-cost, index funds over 10, 15, or 20 years? Most index funds have expense ratios in the range of .15% to .20%; why did you exclude these? I wonder how your fund would compare against a larger, more representative sample? Most index funds accumulate substantial assets in the form of unrealized capital gains, but since you’re holding this fund in a VA, we’ll ignore the issue of managed funds and annual distributions taxed as ordinary income. What about the increased brokerage costs that managed funds have to pay for higher turnover? What about the fees you’re paying to hold this fund in a VA? The vast majority of credible studies that I’ve seen in peer reviewed journals over the last 10 years have demonstrated that you’re almost always better off in a no-load, low-cost index fund. Perhaps you should consider publishing the results of your research.

Gary in Chicago, I think you might have misunderstood my point. I’m aware that units of an annuity arent the same thing as shares of a mutual fund.

I would argue that the situations that require the more exotic benfits of an annuity are more rare than annuity sales people would care to admitt. I would doubt that the average purchaser could articulate “why” they bought a VA–beyond that it was recomended to them.

In many of the cases, the “advisor” could have achieved similiar or superior results for their client at at lower overall cost using something than using an insurance product. In essence, many investors are paying twice the sticker price for the same end result.

You stole my thunder Lucille. I am a fee only advisor and sometimes refer clients to an agent for a VA for their IRA roll overs. Why, well some clients who are 55-70 years old with large account values, don’t want the risk of the market. There are some good VA with living benefits. That is, a guaranteed growth rate, or the market (with no caps) on the accumulation side, then a guaranteed payout based on a percentage of the account for life. The lifetime payout doesn’t even require annuitization until the actual account value reaches $.00.

I use a low cost index type strategy with my clients. when they are looking for guarantees I refer them to this other agent. Not only do i disclose the fees, but I disclose how much the agent will make on the transaction. When it fits, it fits…

I could write for days about the problems with annuities and the abuses that don’t at come with them. However, they are like guns. Guns commit violent crime, people do… My $.02.

Cheryl in Missouri: An investor’s financial needs, investment experience, risk toleratnce, age, and a multitude of other factors are ALWAYS relevant - regardless of the situation. Variable annuities are complex products, they can be more expensive than other investment vehicles, and their tax-deferral benefit is superfluous when dealing with IRA funds. No one is really arguing against those points.

However, variable annuities are not the only arrow in a legitimate financial professional’s quiver. Many of those you broadly accuse of malpractice probably recommend strategies for IRA funds other than variable annuities for the very reasons cited above. However, the point you, Mr. Updegrave, and others are missing is that each client’s situation is different and many clients do not always agree with the recommendations of their advisors. They sometimes choose to go in another direction, based on any number of possible factors ignored by Mr. Updegrave’s article and your comment. Though you may personally disagree with any strategy that includes a variable annuity within an IRA, it does not automatically make that strategy wrong for every client nor does it make the advisor guilty of misconduct.

Darren in Sac: Thank you, thank you, thank you for making my exact point with the car example. You WOULDN’T pay twice the sticker price for the same car. VA’s and mutual funds/index funds aren’t the same car either, therefore they have different costs stuctures.

I think a more telling example of the dubious value of VAs is the arguments I see posted here that are essentially a sales pitch, i.e. “Well some people want a BMW and some a Corrolla..” etc.

I have nothing against advisors making a living, but to borrow the car example, why pay twice the sticker price for the same car?

It would be interesting to hear from some fee-only planners how often they recommend annuities to their clients. I would suspect that its a lot less often than those on a commission structure.

Setting aside some of the obvious points for a minute (i.e., every individual investor’s situation must be considered separately and carefully), my general experience has been that virtually any product put together by an insurance company has an analogue somewhere else that can be obtained for a fraction of the cost.

During a worker’s early years, when he/she is building wealth, emergency financial security can come from an ultra-cheap term life insurance policy. These policies will protect your family in the case of your death (and, if you get one for your spouse, you will have something in case he/she dies) and you can essentially lock in a rate (or a fairly predictable series of rate increases) for up to 30 years.

A prudent saver, having invested in a combination of inexpensive bond/stock mutual funds (both domestic and foreign), will then probably have more than enough wealth (after 30 years of modest living and steady saving) to utterly avoid the need for annuities, variable annuities, equity index annuities, etc.

I’ve been a bit disturbed recently to notice how often school teachers, nurses, and other modest middle income workers are made to feel fear about their financial futures. They’re sweet-talked by the local VALIC man (who brings doughnuts) into purchasing an expensive annuity for which he receives commissions of up to 6%. When you ask the duped individual to explain the detailed nuances of the annuity they’ve just purchased, they typically have no idea what they’ve purchased or what the expenses are. That’s a sign of trouble.

Mr. P’s financial needs, investment experience, risk tolerance, age, etc. are irrelevant. Whoever who sold him an annuity inside an IRA is guilty of malpractice. Watching the financial planners in this blog try to justify their ridiculously complex and expensive “investments” is more fun than Animal Planet.

Yvonne in San Francisco: One final thought. If after you do your research you feel 100% that you should own low-cost index funds vs. any other mutual fund or variable annuity, then by all means get the index funds! Nobody in this forum is trying to pitch you on buying a VA for you. But just because a VA may not be right for you, doesn’t mean that they are terrible for everyone else out there. I happen to love the benefits and guarantees that are available to me ONLY through a VA, so that is right for me and the costs are justifiable. I don’t really care too much about how much of a commission my VA generated for my advisor, I care much more about the benefits it provides me & my family.

Yvonne in San Francisco: Thank you for your comment. Can you please share the ticker symbols of the index funds with the 0.10% expense ratio with no load? I would like to look at them. Please also include the name of an advisor that sells them so I can contact them. Also, although those funds exist, they are still not comparable to VA’s. For example, I could buy a bicycle for a very low expense and no engine, but that bicycle could never provide the value & benefits that my car can provide, it just isn’t possible. Next month when I drive to Montana to see my grandkids, the bicycle won’t do me any good, regardless of how little it costs me to own each year. In regards to your argument of ‘expensive’ mutual funds to ‘lower cost’ index funds: it is a similar argument. Just because the annual cost of ownership is higher, that isn’t enough of a reason alone to not consider them. Finally, let me propose one final though for you and every other person that has commented on this article. Isn’t this the real ‘bottom line’ we should consider: What is the net of fees return your are getting from your investment? Then you must ask, how much risk am I taking to acheive that return? For example (I’ll assume similar risk ratios across all funds so things don’t get too complicated): If mutual fund A has an annual expense ratio of 1.44% along with a 3-yr average annual return of 20% then the net return to the investor is 18.56%. Now let’s say mutual fund B, a low cost index fund with a 0.10% annual expense ratio, has a 3-yr average annual return of 17%, which is 16.9% net of fees to the investor. Finally you have mutual fund C. Fund C is extremely “expensive” at 2.2% annually. But its 3-yr average annual return is 22.2%, for a net return of 20%. So based on your argument of cost alone fund C would be the worst choice, however if you could choose from the net rates of return clearly you would take fund C, because there is the highest net of expenses value associated with that fund. I just did a search on Morningstar for all funds with an expense ratio of 0.10% or lower. There are only 34 that exist according to Morningstar. Then I added in just one of my A share funds (the one with the 1.44% annual expense ratio) and here are the results: Net of the annual expense ratio, there is only 1 single mutual fund that has a higher net of fees return than the ‘more expensive’ fund I own (and I can almost guarantee its one you haven’t heard of). Also, the fund I own is an asset allocation fund which I believe long-term will hedge better against risk & volitility than the 1 single index fund that beat it on the 3-yr return. The 3-yr risk ratio is 1.1 on my fund compared to 1.0 on the index fund of course. Very little difference.

I tend to agree with Walter’s advice about VAs. As mentioned by a prior post, you are basically purchasing piece of mind. This piece of mind can simply be achieved by a different mix of assets at lower fees. For a person unwilling to take the time to understand different types of securities and their advantages, a VA provides a seemingly simple alternative.

Unfortunately, the main benefit of those high fees is guarunteed income, which can be virtually achieved at a lower cost by choosing conservative investments even in a bear market. Along with the guarunteed income of VAs comes a guaruntee of lower earnings in a bull market. There is no such thing as guarunteed returns. The promise of guarunteed returns is usually code-speak for lower returns in a bull market.

Gordon’s argument, though, is essentially comparing a VA with really bad mutual funds. Those expense ratios and loads are horrendous when you can so easily find no-load funds with expense ratios of 0.5% or less.

So once you correct for that, he’s actually paying 4% up-front and 1.5% per year. MUCH worse deal.

Not to mention the fact that anyone who can refer to such expensive funds by saying “wouldn’t trade them for anything” immediately destroys any claim to credibility in finance they might have had.

I’d like to thank Gordon from Phoenix for his insightful post regarding why VA might be a good idea. While I am not convinced that they are the right choice for me, I believe I’ll take a closer look to see if I might be able to incorporate them into my financial strategy.

Both Lucille and Gary could do well to learn from Gordon’s comments on how to present a solid and rational counterargument. It is quite sad when an “average Joe” is able to explain something better than both a financial planner and a teacher of finance!

Lot of interesting comments and opinions here. I guess I reason with the different arguments. From Walter’s standpoint, its hard to address a general audience about any financial topic without speaking in generalities. From the individual’s standpoint, it is scary knowing that people will act accordingly just because they assume the opinion expressed in the article is “the right way”.

This is, of course, what makes me love my job. There is never a boring day in the world of financial planning.

Almost any finanical vehicle can be approporiate if used correctly with the correct client profile, just like almost any financial can be innappropriate if applied without regard for the client’s individual situation.

I read these articles frequently as it helps me have an idea of the information and articles that my clients are coming across. It helps me apply them to their individual situation and make sense of them.

My unsolicitied two cents:

Be wary if someone is selling you a product before they take the time to get to know you and your individual situation. There will always be more than one appropriate way to accomplish your goals, but its hard to identify if your best interest is being met if those goals aren’t discussed and defined before an investment vehicle is recommended.

Keep picking away at annuities, Walter. The only complaint I have about your article is that the warnings aren’t strong enough. Much info about annuities is still nebulous, leaving consumers wondering, “Should I or shouldn’t I” while advisers are in the background doing everything possible to compell the consumer to buy the annuity.
You should add that the annuity fees will forever shortchange investors on the gains their money could be making if it were in low-cost investments. I am preparing to surrender an annuity and pay the 6% surrender charge, because the very low cost of my new investments will quickly offset the 6% loss.

Forgot to add this in my comment… Most people insure their homes against loss by purchasing a homeowners insurance policy. An easy analogy is that like your home, your retirement nest egg is an asset that may need to be protected against loss. I would generally say that the stock market is more volatile than the housing market… VAs may be a good way to protect a nest egg.

Have you given a throught about inflation. So for a high fee in a VA
you get a set amount paid for the rest of your life. Of which the insurance salesmen get big commissions and if you have it in your 401K or 403b it is even worst. So tell me how you are making money when you are actually losing money through inflation and high fees

Give me stocks anytime. Dividends and a chance to make a capital gain. Companies tend to raise their div every year to keep up with infaltion.

I am a financial advisor in Tulsa, OK. This article is correct in that an annuity does not provide any additional tax advantages if you are funding it with an IRA, however, annuities are an excellent place to put money if an investor is conservative or afraid of having their money in the market. There are umpteen riders available for annuities nowadays and they can be quite costly, therefore weighing the cost verses the benefit of having riders to protect your nest egg is important. Depending on the your goals for you nest egg, you may want to select a rider that can provide income for life, or a rider that can maximize the amount of money rec’d by your heirs (death benefit riders). ING, MetLife and Jackson National have some of the top variable annuities in the industry and are financially strong companies. Annuities are a “you get what you pay for” type of financial product, and one should take ample opportunity to learn about all the features and limitations before investing in one. One way this article does not mention you can sidestep the surrender penalties is by purchasing a special “share class” within the annuity you purchase. Most “A” class shares have years before you can pull all the money out free and clear without incurring fees, but there are different share classes that offer short surrender penalty time frames. There are usually higher charges to having the money become available sooner, but once again, you get what you pay for. Variable annuities are unique investment vehicles and like all other investments, one should carefully weigh risks and fees before investing. Variable annuities do not guarantee against loss.

To Gordon H. in Phoenix AZ: You have a mutual fund with a 1.44% expense ratio and a 4.0% front load (you can easily find an index fund with a 0.10% expense ratio with no load)?! And you think your VA cost is just “a little higher”? I highly recommend you read some of John Bogle’s books and see how much of your nest egg has been taken away by costs alone.

Mr. Updegrave is giving advice to Gregory P. without any apparent consideration of Mr. P’s financial needs, investment experience, risk tolerance, age, etc. Mr. Updegrave’s primary beef seems to be that the annual fees charged by variable annuities can be a drag on the growth of retirement savings if one is in the earlier years of the accumulation phase. However, it is not apparent from Gregory P.’s question that this is the scenario presented. His advice also fails to discuss why certain investors may be attrracted to features of variable annuities that are not available with mutual funds, ETFs, or immediate annuities. In short, giving advice in the fashion represented by this article is suspect.

There is also a clear distinction between a variable annuity (the subject of the question) and the equity-indexed annuities that were the focus of the “hidden-camera investigation” referenced in Mr. Updegrave’s article. That investigation highlighted questionable EIAs being pushed by agents at free lunch seminars with no compliance oversight and no regard for suitability. To the extent that Mr. Updegrave is attempting to lump all licensed financial professionals into the same category as those buffoons, he should be ashamed.

Rick in NY, you use google search for your financial advice, I’ll stick with my advisor thanks!

John in NY, do you have any idea what commissions are on VA’s???? Please don’t confuse a VA commission with a fixed or EIA commission. They are not in the same ball park. Notice VA’s were never mentioned in the Dateline piece?

Mike in SF, yes I did read it carefully . Did you read my post carefully??? VA’s inside IRA’s can work often if the investor is risk averse and wants a guarantee. Walter mentions this and then goes right to the fee of this type of product. This writer’s tactic is called a red herring. Did YOU read the article carefully???

By the way, I’m 36, risk averse, I teach finance at a rather large university in CA, and put my advisor under the microscope and totally approve of my retirement portfolio. Would you like his number? Well, back to the slopes!

Rick in New York, don’t ever buy a Mercedes or a BMW, not because they aren’t good cars, but ONLY because the sales reps just make too much of a commission!!!! Just keep driving your Corolla or a Civic, or the Dodge Neon. Granted, they don’t have anywhere near the features of those other cars, but who cares?? I just couldn’t sleep at night knowing that the BMW sales rep made a large commission from my sale, that would be the worst thing in the world. Those BMW guys must all be crooks when they could be selling Civics & Neons.

To me, it seems like there’s nothing a variable annuity can do that a combination of mutual funds/ETFs and immediate annuities can’t do at a much lower cost. The guaranteed income and principal for high fees looks like it’s for risk intolerant, mathematically challenged people. The benefits are all psychological. Xanax does the same thing at a much cheaper cost.

I can’t believe anyone (Lucille & Tom below) would argue that a variable annuity inside an IRA could be a good thing.. If you do a google search with the words “variable annuity ira” you will find tons of websites arguing AGAINST putting in a variable annuity inside an IRA. The main reason why people put up with the high fees of variable annuities is to defer taxes. If you are in an IRA there is absolutely no reason to pay the high fees. No matter what your financial situation, there is most likely a more appropriate investment to hold in your IRA. The only people who can argue otherwise are the financial advisors making their high commissions off of variable annuities and the clients that they’ve duped into following their advice.

Tom & Lucille - Did neither of you read the article closely? Walter clearly states at the start of the article that VA’s might be appropriate in certain situations. And indicates that “…depending on your situation, it can make sense…” Before you post read the article a little more carefully, and VA’s generally do not make sense for younger investors with a longer investment timeline.

I love it. Why does anyone read this if they think they’re already an expert?

I’m also a financial rep and I use highly rated insurance companies in about half of my business to provide people with peace of mind that they get from having a guarantee on their invested principle and guarantees on their income and death benefits. You really do miss the major points when dishing out your advice when it comes to annuities. And as far as your recommendation for immediate annuities, I would be very sure that the client WASN’T annuitizing their money which also means giving up control of their money. You never mention that very important fact. You are part of the media that misreports and is part of the problem with this country.

I’m also a registered rep and I happen to agree 100% with Tom in Denver. The fact that you make these recommendations based on such little information about the client is ridiculous!! The problem with your articles is this Walter: You have no accountibility as to what you print or recommend. FINRA, the SEC and State Insurance Commissioners have no jurisdiction over what you say because you don’t hold any licenses with them, therefore you can say whatever you feel like saying. We, as licensed professionals, don’t have such freedoms. If I ever made recommedations the way you did, those same governing bodies would shut me down faster than you can say “I hate VA’s”, but yet since you work for CNN Money, then everyone should listen to you. Please. You are a columnist, not a financial advisor. You don’t ever meet the clients you give recommendations to, much less do you actually have to be accountible to them if they were to actually take your advice.

I have had a Variable Annuity for 3 years now. I actually just met with my advisor the other day for an account review because I had read so many different articles lately, most of which were negative towards mixing IRA’s in a VA, and they also mentioned the “high fees” of the VA. I also own some great mutual funds that have performed well for me over the last several years, I love them. Anyway, I asked my advisor to compare the cost structure of my mutual funds vs. my VA. The A share mutual funds have a total annual cost of 1.44% and I also had to pay 4.0% up front to get in. They have been great, wouldn’t trade them for anything. My VA however has a total annual cost of 2.4% for the first 8 years, then that drops to 1.8% annually thereafter (according to the worksheet I was provided, that includes the VA cost, the income rider cost and the subaccount cost). So expense-wise, I’m a little higher in the VA. But in the VA I also get the ability to lock in all of my gains and guarantee an income stream on that highest value, an income that will last the rest of my life guaranteed. My mutual funds can’t do that. I’m now 61 and pushing retirement and I am very excited about not having to worry as much about what the stock market does while I’m in retirement. I will GLADLY pay and extra 0.36% per year for that guarantee (and peace of mind), inside or outside of an IRA. My advisor has done me very well and I think his advice is money very well spent.

The previous comment given by “Tom” was a typical response given by a Financial Advisor trying to justify his pathetic profession. If people had half a brain they would realize that they dont need anybody but themselves to handle their finances. Anybody who would recommend to buy a variable annuity within an IRA should be put in JAIL! All there after is the commision and they dont give a rats ass about the financial well being of their client…

Bye! Bye!

Mr. Updegrave: While I do agree with some of the advice you give, most of it is just blanket statements that are somehow supposed to fit all investors. When talking about VA’s you never seem to talk about all of the other features and benefits that come along with many of the VA’s today. You simply compare them to mutual funds and/or ETF’s (which I like both by the way, in appropriate circumstances). That is like comparing driving your car to taking a flight when looking at travel options. Are they both viable options for travel? Of course. Is one better than the other? It depends. In certain situations, one could be much better than the other. In other situations, the opposite may be true. But to say that people should just drive only because its cheaper than flying is absurd. This article (and most others I’ve read on your site) doesn’t even share the client’s age, financial status, income needs, investing experience, nor anything else about his other assets that would be critical in order to make an appropriate recommendation, but yet you start right in with “dubious sales pitches” and bashing VA’s, when this product could very well be the most suitable product out there for his situation. Please provide more information about the client’s situation or don’t make a recommendation at all. Let me put it this way….as a licensed rep, if I ever even attempted to make the recommedations that you do, based on the little information that is given, I’d be banned from the industry.

I happily pay a higher fee on my IRA/VA knowing my principle and my income is guaranteed. Not to mention the performance of my investment is in an asset allocation model similar to those with 100k investment minimums. Also, my advisor put me in a variable annuity where my money is liquid. Shame on you Walter, you have a mighty large axe to grind!