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Why annuity sales have skyrocketed
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It's the need to recover the money paid to the salesperson for his commission that contributes to the high surrender fees that typically lock up an investor's money for at least seven to 10 years, says Joel Javer, a certified financial planner and a partner in the firm of Sharkey, Howes and Javer Inc. in Denver, Colorado.

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Surrender fees are charges, usually hefty, a customer pays for canceling a policy before some specified time has elapsed.

Craig Israelsen is professor of consumer and family economics at the University of Missouri-Columbia, and author of the book, The Thrifty Investor: Penny-Wise Strategies for Investors on a Budget. He notes that the increase in sales also can be attributed to the activity of monster mutual fund companies such as Vanguard, Fidelity, T. Rowe Price and TIAA-CREF, which offer the annuities at lower costs. TIAA-CREF, for instance, doesn't charge a surrender fee and keeps total expenses at between .37 and .39 of the account balance.

"The big, big hitters started to introduce annuities eight to 10 years ago," he says. "They have enormous market presence because they have a huge clientele that invest in mutual funds. They come in and sell huge volumes and not take as big a cut. That's clearly Vanguard's perspective. That was good for consumers; it provides competition for insurance companies."

Combine that with the runaway performance of the stock market in the late 1990s, and it's easier to see why investors flocked to variable annuities.

"The planets kind of lined up in the benefit of annuities, particularly variable annuities," Israelsen says.

This year, things are different, Wesley says. As investors realized the economy wasn't going to bounce back, his sales went flat.

"Sales are down dramatically," he says. "The equity market put a damper on everything. In the middle of April, people started to buy again, but they bought the fixed accounts. They're being very cautious."

Annuity benefits
In their defense, annuities offer some benefits to certain individuals. If you have maxed out your IRA or 401(k), they are a way to set aside more money for retirement tax-deferred. Plus, many people like the security of knowing they'll receive a guaranteed sum of money every month for the rest of their lives, Israelsen says.

"The popularity would be increasing because people are living longer," he says. "An annuity, if they're structured, there's a guarantee of income for life as one of the options. That's pretty attractive. People like that idea of a guarantee, even if it's smaller than a mutual fund they choose to annuitize on their own. Not everyone likes to be their own financial adviser."

A decision to buy an annuity has to be carefully weighed against the other investment options that have lower fees and far more liquidity than an annuity. And if a salesman suggests that you buy an annuity inside your IRA, financial advisers are unanimous in their advice -- show him the door.

Sestina calls the practice a debacle because the two products do the same thing -- shelter income from taxes. There's no reason to use funds from one to buy the other.

"It's crazy because the insurance product is a tax-sheltered product," he says. "Anything you earn on it, you don't pay taxes on it currently. That's the whole reason you buy an IRA. If I'm out there recommending investments (for an IRA), I recommend ones with high turnover and taxability."

Javer was even more pointed in his criticism of variable annuities sold in IRA accounts.

"That's the most ridiculous thing in the world," he says. "That says it all. There's no reason to do it than to disguise a commission, so they can sell it as a no-load investment. I have no bias as to how people are compensated, but when I see variable annuities in IRAs, I know why they did it. You probably wouldn't use the word 'scum.' Well, maybe you would."

For a well-balanced look at what annuities can and can't do, check out All About Annuities at FundAdvice.com.

Bankrate.com's corrections policy -- Posted: Aug. 7, 2001
 
 
More stories by Pat Curry
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