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Retirement Planning > Retirement Investing > Annuity Investing

Another blight on the bruised annuity industry's reputation

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Last week it was quite hot in the New York City metropolitan area and keeping the oven turned off seemed like a great idea. After having seen a poster for complimentary appetizers at a tidy little Italian restaurant down the street, my girlfriend and I got dressed and slowly meandered down the hot sidewalk to get our dinner.

We had our appetites, a bottle of wine, the promise of free appetizers and each other. Despite the horrendous heat, we were rather happy. We sat pleasantly in the back corner of the restaurant, sipping our wine, discussing baseball and reality T.V. (respectively) and picked at a wonderful plate of grilled calamari.

After we finished our entrees and asked for the bill, I realized that the advertised free appetizer was anything but free. I inquired with our waitress who in turn conferred with the management. She came back with a simple answer: “Due to financial circumstances we have to renege on our advertised offer.” OK. Although I got over paying the 10 bucks for the dish rather quickly, that seems pretty disingenuous; it would not be a tough task to have someone from your establishment take down the posters that you have advertised all over town touting free appetizers.

But, why would they want to do that? What they advertise gets people in the door and once they are in, the ownership can treat them however they like. This brings me to the recent state of the annuity industry, which is disastrous.

Several insurance companies as of late are offering their variable annuity owners buyouts or insisting that they move into investments with lower returns. This is happening because, like the restaurant, when things are going well, companies tend to overpromise and, in the case of the Italian bistro, when business is down, and they can’t live up to their end of the deal. Insurers are battling a protracted low interest rate environment, regulatory vagueness and an anemic overall economy. They cannot live up to the generous income and death benefits they promised.

Fair enough. Everyone gets in a financial pinch sometimes and insurers are no exception. The issue here is the monumental public relations flub carriers have put themselves in. Instead of calling press conferences and explaining why they have to curtail their benefits they are sending sneaky little letters, designed to look like innocuous mail to customers with no indication that they could be urgent.

What a moronic strategy. Americans love repentance, we laud a good public apology; look at New York City’s current mayoral candidates. Why make things look like a scandal when there is none. Just say, “I’m sorry, the economy is bad, the low interest rates are killing us and we need to make some changes to the product you purchased.” Just take down the free appetizer posters.

But, as the annuity industry always does, they fail to explain themselves properly and they further damage their reputation in the eyes of the general public. I do not think there is any “annuity puzzle” as economists theorize. As my colleague Allison Bell wrote in a recent column, most people do not know what the hell they are, and those that do have a low opinion of them or are utterly confused. This, unfortunately, is the status quo for the annuity industry. The product is logical and useful to individuals across all socioeconomic levels, it is just branded and managed in an abhorrent manner. As I have said before, when most people hear the word annuity, they think of structured settlements. What will it take for the industry to get its act together and explain to people how this product can work for them?

Apparently nothing. The recent disaster regarding the public relations strategy that carriers have employed in curtailing overgenerous benefits will not change anything. Annuities are a product that are destined to leave a bad taste in people’s mouth if things like this keep happening. Speaking of bad taste, I do not think I will be eating at that restaurant again and I will be advising my friends not to, either. I imagine the individuals who have had their benefits chopped with no coherent reason explained to them may be saying the same thing to their friends, “Stay away from there.”


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