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Anti-Annuity Stance Softening Among Advisors and Investors

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A big 80% of defined contribution plan participants showed interest in putting all or some of their retirement money into guaranteed lifetime income products as either an in-plan purchase or one made at retirement, the 2018 Retirement Confidence Survey found.

Perhaps without realizing it, those individuals ages 25 and older may be talking annuities.

The survey of 2,042 workers and retirees was conducted last January by the Employee Benefit Research Institute (EBRI) and research firm Greenwald & Associates.

It’s indeed possible that the long-established attitude about annuities may be starting to change.

For the last few years, some financial advisors have become increasingly in favor of certain types of annuities used where appropriate.

“An immediate annuity is absolutely going to be extraordinarily important to consider, especially if, like me, you believe that market returns will be modest over the next decade or two,” says Harold Evensky, chair of Evensky & Katz/Foldes Financial Wealth Management, whose main office is in Coral Gables, Florida.

He continues. “Another reason I’ve changed my opinion about the importance of annuities — in particular, the immediate annuity — is because it’s the only investment that will guarantee you’ll have an income stream no matter how long you live. And with mortality insurance, the annuity has potential for an extra return.”

But two major issues concerning annuities still cloud the picture: One, clients tend to be reluctant to lose control of their retirement savings to an insurance company and forgo the opportunity to make high returns if markets do well. Two, advisors don’t earn residual revenue once an annuity is purchased and therefore aren’t jumping up and down to recommend them.

“Because annuities aren’t a financial benefit to them, advisors don’t offer them. Most advisors shy away. That’s a big problem in the industry,” says Anna Felix, an advisor with CalChoice Financial in Turlock, California.

“Annuities can be a good thing on a case-by-case basis,” Felix says. “Some aren’t good, but some are amazing.”

Only 46% of consumers were aware that annuities provide guaranteed lifetime income, a 2017 survey by Jackson National Life Insurance and the Insured Retirement Institute found.

During the extended period of low interest rates, there’s hardly been a pressing argument to incorporate most types of annuities into financial plans.

But, says Evensky, “the bottom line is that financial advisors absolutely should at least be learning about immediate annuities and start factoring them into their analyses. I believe there’s not much risk in waiting [to buy] till interest rates go back up, but advisors need to start considering them.”

In the EBRI survey, 21% of defined contribution plan participants said they’d use their plan money to “purchase a product that provided guaranteed monthly income for life.”

That’s a significantly larger share than the 7% of retiree respondents who said they’d already bought that type of product with their DC plan assets.

“When [people] say they want the guaranteed side, they’re telling you that don’t want any losses. An annuity can provide them with an atmosphere where there won’t be a loss — and you may even experience some growth,” Felix says.

In advisor Meredith Briggs’ experience, clients frequently ask about annuities. But the co-owner of Taconic Advisors, in Poughkeepsie, New York, notes: “It can be a tricky question that involves not just a clear understanding of the client’s income needs but their available sources of retirement income, tax situation, legacy goals and whether their spending level puts them at risk of outliving their resources.”

She continues, “Sometimes we find that annuities are appropriate; but if the client’s retirement accounts are well funded and legacy goals are a priority, an annuity may not be” suitable.

Bringing up the subject of annuities to clients can be a good idea since the EBRI survey suggests that many retirement plan participants “don’t know what to do with their DC plan assets at retirement.”

Thirty-one percent say they “don’t know whether they will roll the money into an IRA, keep it in the plan or cash it out,” Craig Copeland, EBRI senior research associate and co-author of the report, has said in a statement.

According to Evensky, the best solution likely is putting part of the client’s retirement funds in an annuity and the other portion in traditional investments. “But that requires a lot of analysis and depends on what resources the client has, their goals and their health. There’s no way to do this seat-of-the-pants,” he says.

Another guaranteed-income-for-life product that could be considered is longevity insurance, which is a deferred immediate annuity and “may be more palatable for some,” Evensky notes. If  purchased at, say, age 55, payments typically start when the policyholder reaches about 85.

An idea to raise consumer awareness about annuities comes from Stan Haithcock (aka “Stan the Annuity Man), as proposed in a ThinkAdvisor article published Oct. 17, 2017.

He said: “There should be just one ad: ‘Annuities. Lifetime Income.’”

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