Putting a variable annuity inside an individual retirement account or qualified plan may seem redundant, given that each of the vehicles offers tax-deferred growth of the investment. But an increasing number of boomers are opting for this strategy. The reason: the annuity’s guaranteed living benefits.
“Many clients who have accumulated sizeable funds [inside a qualified plan or IRA] want to be sure that at least some of the money is locked in and protected,” says Beau Brock, a financial planner and principal of Brock and Associates, Tulsa, Okla. “The closer the client is to retirement, the more attractive the annuity’s guaranteed living benefits become.”
Ted Sadar, a financial planner and principal at Sadar Financial, Akron, Ohio, adds, “What distinguishes the variable annuity from other equity-based alternatives are the guarantees. These are very powerful product features.”
A study unveiled in March by the National Association for Variable Annuities, Reston, Va., reveals that annuities’ income guarantees and insurance benefits are driving most clients to include the products inside qualified plans and IRAs. Financial advisors polled said they placed 42% of annuities they sold into a qualified plan or IRA. Sixty percent of all annuity sales in 2004 were in qualified plans, NAVA says.
Additionally, 70% and 61% of survey respondents, respectively, cited the annuity’s death benefit and the living benefit riders–guaranteed minimum accumulation, guaranteed minimum income and guaranteed minimum withdrawal benefits–among the top three reasons for recommending annuities inside qualified plans or IRAs. Also, 66% of those polled named guaranteed lifetime income as one of the top three reasons.
Not all advisors see the guarantees as worth the extra fees, which can add two percentage points or more to the annuity’s cost. Darius Gagne, a principal at Quantum Wealth Management, Santa Monica, Calif., regards guaranteed-backed annuities as “extremely expensive products with many non-transparent fees.” When the annuity is placed inside an IRA, he adds, the product’s tax advantages also become subject to IRA distribution rules.
However, Kevin Meehan, a principal of CDHM Financial Advisors, Itasca, Ill., says the VAs are increasingly competitive with alternative investments, a development he attributes to increased regulatory scrutiny and bad press in prior years respecting the products’ high cost.
“As variable annuities have become more price-competitive, the spread between the fees paid for the product guarantees and the fees paid to advisors for other investments has grown smaller.”