Annuity Critics Made Misleading and False Claims, Alliance Director Says
Your recent article, entitled “Secure Act Critics Want Better Protections for Employer-Sponsored Annuities,” about the inclusion of annuities in 401(k)s and other employer-sponsored retirement plans — a prime benefit of the recently passed Secure Act — would benefit from some much-needed clarity.
It is misleading to suggest that employer-sponsored retirement plan participants are at risk from the failure of an annuity provider under the framework provided by the Secure Act. Among other things, it ignores the proven system of state insurance guaranty associations that provide $250,000 or more in annuity benefit protection to each of our nation’s policyholders.
The article also objected to accumulation annuities (e.g., variable and fixed-indexed products) in defined contribution plans. To be certain, purchasing annuities for tax deferral in a qualified plan would be redundant. But tax deferral is often not the primary factor individuals consider when determining whether to purchase an annuity with qualified funds. The tens of thousands of Americans that purchase an annuity for their IRA every year testify to this. Many variable and fixed-indexed annuities now offer living benefits in addition to their traditional death benefit guarantees.
The article also neglected to mention the benefits of fixed annuities, immediate annuities and qualified annuity longevity contracts in such plans, especially for middle-class retirees. In general, annuities are the best, most cost-effective means of ensuring lifetime income throughout one’s retirement.
Risk — an important consideration for any retirement investor — was so imprecisely addressed that the article is likely to mislead readers. Insurers were inaccurately characterized as concentrating risk when they buy derivative options in order to meet product guarantees, when they are using derivatives as hedges. The nature of the hedge strategies is to protect against adverse market movements, such as falling equity markets or declining interest rates. Contrary to the article’s suggestion, these strategies protect plan participants.
In addition, the article makes the sweeping generalization that insurers don’t have a lot of experience reserving for variable annuities. This is outright false. Insurers have been hedging variable annuities for decades, and they are exceptionally experienced and proficient at it.
Finally, the article argues that small business plan sponsors lack the sophistication to assess an annuity provider’s income guarantees, but are they any more or less adept at selecting mutual funds or other financial products? Not only are easy-to-use-and-understand resources available to small businesses for selecting annuity providers and mutual funds alike, small business are more capable of sponsoring a retirement plan than suggested in the article.
The Secure Act is a response to the reality that the three-legged stool of retirement security — employer pensions, personal savings, and Social Security — has toppled over the past forty years. Despite the emergence of 401(k)s and other defined contribution plans, our research shows approximately 64% of U.S. households (80 million) have no source of protected monthly income other than Social Security.
Other than pensions and Social Security, annuities are the only source of protected lifetime income available today, which is why it’s important that more employers offer their employees the option to select an annuity as part of a truly comprehensive retirement plan.
Executive Director, Alliance for Lifetime Income