That's the deeply flawed logic of a recent Huffington Post article, calling annuities "the biggest financial rip-off on the planet." The article clearly illustrates a lack of understanding of the annuity marketplace and the challenges of generating lifetime retirement income. And it does a major disservice to the public by labeling annuities "toxic" and believing that there's an "annuity scam" being put in place by Congress.
The article correctly describes the downside of some deferred annuities, such as high early withdrawal penalties and the high fees associated with some annuity products. And I agree with this criticism, as illustrated by a recent post of mine. Fellow MoneyWatch blogger Allan Roth has highlighted the misleading sales pitches used to hawk equity indexed annuities. But the HuffPo blog paints all annuities with its ill-informed brush, including single-premium, immediate annuities, which deserve consideration as one part of a retiree's income portfolio.
An immediate annuity pays you a monthly income for the rest of your life, no matter how long you live and no matter what happens in the economy. That's a powerful tool at your disposal, given the uncertainty about how long you might live and the gyrations in the stock markets. And there are new annuity shopping services that competitively and transparently bid your annuity, such as Vanguard's Annuity Access Program through Income Solutions. I'd hardly call Vanguard a perpetrator of "annuity fraud" - a term bluntly used in the HuffPo blog post.
Some apples are bad. Therefore all apples are toxic.
The HuffPo article goes on to criticize regulatory efforts to allow annuities in 401(k) and other retirement plans, wondering why the Obama Administration is enabling "retirement rip-offs" and accusing Treasury regulators of being bribed by Wall Street. The regulatory effort to examine appropriate retirement income solutions in 401(k) plans has been going on for quite awhile now, and has been quite transparent. Last year, for example, more than 800 companies and individuals provided input to the Department of Labor on this topic. To say that Treasury retirement plan regulators are in bed with Wall Street is simply unfounded and ridiculous.
The article illustrates a complete lack of understanding of the process in which 401(k) plans are designed and implemented by employers. Decisions about the offerings in 401(k) plans are made by fiduciaries -- typically members of senior management. Normally, these fiduciaries are deeply concerned with acting in the best interests of plan participants. Most people in this role have no conflict of interest, and wouldn't think of implementing a product that is "toxic" or a "rip-off." Not only do most fiduciaries take their role seriously to act in the best interests of plan participants, they also could face fines or jail time if they act counter to the interests of plan participants. These fiduciaries are trained to tell the difference between "retirement rip-offs" and useful plan offerings.
While there are isolated instances where these fiduciaries fail to do their jobs, as might be the case in the lawsuits mentioned in the HuffPo post, it's totally paranoid to jump to the conclusion that well-intentioned regulators, 401(k) plan fiduciaries, and the Obama Administration are scheming to rip off plan participants.
Some fiduciaries fail at their job. Therefore all fiduciaries will fail to protect your interests.
While the article correctly states that the savings of most older Americans are woefully inadequate to fund a traditional retirement, that's irrelevant when it comes to deciding whether annuities are appropriate for generating retirement income. In fact, immediate annuities often generate the highest amount of initial retirement income from 401(k) plans, compared to other methods of generating lifetime retirement income, as shown by one of my recent posts. Immediate annuities can actually be a smart way to make the most of meager retirement savings.
Some water is poisoned. Therefore avoid drinking any water.
The HuffPo piece also spreads misinformation about providing benefits to widowed spouses, saying that surviving spouses are losers who will no longer be able to access the annuity to pay expenses. While it's possible this has happened in some instances with deferred annuities, it's far more common that joint and survivor versions of immediate annuities have been essential at providing financial security to surviving spouses.
I'm not saying immediate annuities are for everybody, and even if you're considering immediate annuities, I wouldn't put all my retirement savings in one. In fact, there's unbiased academic analysis suggesting that buying an immediate annuity with some of your savings and then investing and drawing down the rest of your savings is a good strategy to generate income that lasts the rest of your life and might keep up with inflation.
Don't be swayed by sensational rants about annuities that have no basis in reality. Instead, take the time to learn about the different ways you can generate lifetime retirement income, including the use of immediate annuities.
Annuities are not the viper in the retirement nest that the HuffPo article would make them out to be. But don't just take my word for it - check out other balanced sources, such as articles posted by Kiplinger's or The Economic Theory of Annuities, a book written by Princeton University professor of economics.
P.S. In case anybody is tempted to attack this messenger, I'm an actuary who has never worked for an insurance company or any other investment institution. I've worked all of my 35-plus year career at independent consulting firms.
More on MoneyWatch:
- Beware of Deferred Annuity Salesmen: A Case Study in Generating Retirement Income
- IRAs and 401(k): 3 Ways to Generate Lifetime Retirement Income
- Retirement Income Showdown: Annuities vs. Managed Payouts
- IRAs and 401(k): Maximize Retirement Income with Immediate Annuities
- IRA and 401(k) Retirement Income: How You Can Get Both Predictability and Flexibility