Complex Annuity Products Make Retirement Investing Difficult


According to an article in Business Week in the Fall of 2007, equity-indexed annuities ? which lets the investors share in the stock market gains with a minimal risk of loss ? are getting the worst press and the most regulatory scrutiny of any financial product pitched to individual investors. Most of the regulatory scrutiny focuses not on the investment itself but on the hardball sales pitches that fail adequately to explain the fee structure, especially the early withdrawal penalties.

In 2007, attorneys general in two states filed suits against equity-indexed annuities insurers for inappropriate sales tactics. Likewise, a federal judge in Minnesota certified a class action against the largest purveyor of such annuities, Allianz Life Insurance Company of North America, for faulty disclosures. (Page Perry is serving as one of the colead counsel for the plaintiffs in that class action).

While regulators have limited their investigations into how the equity-indexed annuities are sold, others are criticizing the investment itself. John Gray, a financial advisor in Texas, says that equity-index annuity terms are such that investors would be better off buying zero-coupon Treasury bonds and an ordinary index fund. While replicating an annuity strategy may be cheaper, just picking an annuity is more convenient. Also, annuities give you tax deferral until you cash out.

Generally, indexed annuities are considered riskier than fixed-rate annuities or bonds but less risky than variable annuities or stock mutual funds. The biggest selling point of these annuities, however, is that its value does not decline if the market does. Instead, it builds s in a guaranteed minimum return. These “no loss” policies sound too good to be true because they are. The annuity owner does not receive all of the stock market’s gain and does not receive any of the dividends generated. But the product’s no-loss feature can protect investors from a stock market loss in time for cash-out.

Comparison shopping among the various annuities is difficult as features vary greatly between companies. Before investing in an equity-indexed annuity, the author of the Business Week article encourages investors to consider the following questions:

1. How much market return do I get?

Returns are usually capped in these annuities and some use a participation rate to determine what percentage of the index gains an investor will receive. There can also be a charge of one to two percentage points each year.

2. How is the equity index’s gain calculated?

At first, most annuities simply measured the index’s gain over the annuity’s life (known as “point to point”) or they tacked each year’s return onto the previous one (called an “annual reset”). Some annuities now use the index’s highest level or “high-water mark.”
3. What if I want to get out early?

Since the broker’s commissions are paid up front and it takes a few years for the insurer to recover these from annuity profits, there is always a surrender charge for cashing out early. Some of these charges start as high as 20% with a decline each year. While many annuities have 7 years of surrender charges, others levy such charges for up to 12 years.

4. Who is behind the annuity?

An annuity is backed only by an insurance company’s promise to pays so a potential investor should check the financial soundness of the insurer.

Investors who fall prey to an aggressive pitch despite thorough research may safely opt out and obtain a full refund within the 10 to 20-day “free look” period required in most states. But the free look provision only protects a handful of the investors who have been sold unsuitable equity-indexed annuities.

Page Perry is a ten lawyer Atlanta-based law firm with over 125 years collective experience representing investors in securities related litigation and arbitration. While past results are not necessarily indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry attorneys have successfully handled variable annuity and variable life insurance cases for over 20 years. The firm is currently involved in a number of variable product cases. For further information, please contact us.