2Q VA Sales Show Slight Uptick, But Year-To-Date Sales Lag

And finally, a few words on recent market volatility and variable annuities. According to the Hewitt 401(k) Index, the volume of balance transfers in 401(k) plans on September 29 was 2.1 times the trailing 12-month averages, with 43% of those transfers going to stable value funds.

Of course these statistics should be put in context: Only 0.10% of assets were transferred, 401(k) assets are disproportionately weighted toward older participants more concerned with capital preservation, and it is likely that these “flight to safety” transfers were also weighted toward older participants. Still, this means that over $1 billion in real participant dollars were transferred at closing prices on the 29th after having lost 7%, 8% or more, and likely will not be transferred back to equity funds until after the losses of September 29th have been recovered, and potentially not until significant gains have been made.

It is reasonable to extrapolate a similar scenario playing out in IRA and taxable accounts across the country, particularly in those held by older Americans. As I have written many times in the past, the choice of the appropriate mix of investment vehicles is impacted by myriad risk, investment goal, health, income need, and bequeathment factors, and there is no single investment basket that is appropriate for all of one’s eggs.

What I continue to find disturbing, however, is how often the argument against variable annuities focuses solely on costs. If a VA with a living benefit guarantee can provide the peace of mind to prevent nervous investors from making that fear-driven asset transfer, realizing a significant loss and likely missing out on the inevitable recovery, is that investor not ill-served by such an unbalanced discussion of these products?

Certainly no one knows where markets go from here–further declines and a severe or protracted bear market may prove the stable value transfer prudent for some investors in hindsight, particularly those generating income from their portfolios. But this reasoning is specious; asset reallocation should be driven by needs assessment and long-term investment goals rather than a knee jerk reaction to downside volatility, and foresight never tells us the same things as hindsight. If it did there would be reports of widespread high volume transfers from equities at peaks instead of troughs!

The appetite for risk rises with the market, and risk aversion rules when buying opportunities abound–there is a reason it is called the cycle of fear and greed. As is so tiresomely and obviously pointed out in the financial press there is no question that the fee structure of a typical VA with a living benefit is a drag on performance relative to a similar portfolio of no-load mutual funds, but the consequences of chasing positive performance (greed) and running from negative performance (fear) are potentially far worse.