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Is the Attack on Annuities Still Fair?

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What You Need to Know

  • While RetireOne found that only about a fifth of advisors object to annuities on general principle, they're a vocal minority.
  • Annuities can create a reliable income stream by insuring a portion of a retiree's portfolio.
  • Advisors who aren’t considering annuities may not be listening to what their clients and prospects want and missing significant opportunities.

Last year, Citywire RIA published an article by Andrew Foerch, “Attack of the Annuities: Should RIAs Reevaluate the Controversial Insurance Product? The piece offers a balanced analysis of the insurance products by giving voice to both proponents and detractors. Ultimately, he concludes that while annuities are making progress, they’re too controversial for many advisors to consider. 

“The curse lives on,” he said.

But Does It? Are Annuities Cursed? Are They Even Controversial?

In 2021, RetireOne conducted a survey of fiduciaries, and we found that only about a fifth of them object to annuities on general principle. That doesn’t seem controversial; it seems like a vocal minority are still making arguments that may have once been true but no longer hold much water. According to our survey, most fiduciaries would recommend annuities if they served the client’s needs.

Objections From an Earlier Time

To be fair, there have been many valid criticisms of annuities over the years. The article talks about stiff, opaque fees, liquidity risk and hidden profit spreads “many times in excess of 200 basis points.”

I’m sure you can find examples for which these criticisms are true, but those are the annuities of the past. As the industry trends away from commission-based and toward fee-based structures, fees are becoming more transparent, surrender penalties are disappearing, and those old objections are relics.

Another concern raised in the article is single-entity credit risk, which is common to nearly every kind of insurance. When you insure your home, for example, a single entity is responsible for paying your claims.

And that brings up another salient point: Annuities are not investments, as many detractors seem to frame them. They may include an investment component, but annuities are valuable because of the insurance they provide. 

If an investor isn’t concerned about the company insuring their house going belly-up and leaving them holding the bag, why would they worry about that with an annuity? Highly capitalized and highly rated insurance companies alleviate such concerns.

Not Attacking, but Protecting

I also find the title “Attack of the Annuities” ironic. Annuity issuers are unique in their ability to provide durable protections aimed to insure against terrible market events. This is why these protections can even be called “guarantees.”

We live in a time of tremendous financial uncertainty. Earlier this year, Barry Ritholtz wrote about the “post-normal economy,” making the point that it’s hard to find normality no matter where you look in our current economic climate. Between the pandemic, supply chain issues, trade wars, Russia’s invasion of Ukraine, and other recent factors, traditional economic measures and signals have become increasingly difficult to separate from the noise, and this has made people understandably nervous.

Meanwhile, we’re seeing more talk about the need for Social Security reform if it’s to support the thousands of boomers retiring every day. Pensions are no longer prevalent, so retirees are on the hook for, and bear all of the risk, of generating enough income from their retirement savings to last a full retirement. It’s a heavy burden.

Consider that low-for-long interest rates have also made it difficult for traditional asset allocation strategies to properly protect client portfolios. Now, academics are voicing concern that traditional drawdown rules of thumb such as the 4% rule need to be revised to account for lower-than-expected safe withdrawal rates.

Like all insurance, annuities are designed to protect, not attack. They offer protection against financial downturns, sequence risk, and diminished spending power in retirement. Their intent is to take some of the uncertainty and risk out of retirement, so retirees can have the security of guaranteed income when their earning years are over. If anything, annuities attack risk, and ultimately, uncertainty.

Protecting Against What?

Annuities are not a single product. There are many, and each may address a single, or multiple risks. In this regard, they are not a “one size fits all” solution. 

During the “fragile decade” — the five years before retirement and the first five in it — retirees are especially vulnerable to sequence of returns risk. The dual forces of drawing down assets and decreasing asset values in a down market can increase the likelihood of an individual investor being forced to choose between living a more meager retirement or running out of money.

Annuities of different stripes were designed to bridge this fragile decade, by either insuring against losses explicitly, or insuring a guaranteed level of income regardless of market performance. Creating a durable, reliable income stream by insuring a portion of their portfolio may allow retirees to withdraw less from their other retirement savings, and even leave more of their portfolio invested in the market than they would otherwise feel comfortable with.

A new kind of annuity, a contingent deferred annuity (“CDA”), unbundles the insurance protections from the underlying investments to allow advisors to build lifetime income streams for clients by covering retail mutual funds and ETFs in traditional IRAs, Roth IRAs or taxable brokerage accounts.

This allows the risk to be “wrapped” without the footprint of a traditional income annuity or variable annuity, and the coverage may be dropped once an individual investor successfully navigates the fragile decade.

So, What Is the ‘Curse’?

This “curse” that apparently plagues annuities is more about perception than anything else. Many financial advisors focus on return on investment and maximizing ROI for their clients. From that perspective, annuities may not measure up.

But there’s that trap again: Annuities aren’t investments. They’re insurance. And a better way to think about them may be in terms of protecting ROI rather than improving it. 

The point of saving for retirement is to be able to spend in retirement. And while saving a large nest egg is certainly part of achieving that goal, tools such as annuities can create guaranteed streams of income such that retirees don’t have to worry about withdrawing money from their retirement accounts to meet their basic needs. Retirees can be free to think about what they want to spend their money on.

It’s certainly true that there are still advisors who hate annuities on principle, but they’re increasingly in the minority.

It’s also likely that clients want annuities more than advisors realize. A recent study by the Alliance for Lifetime Income and CANNEX found that 85% of investors were interested in owning an annuity, and of those investors, 49% were extremely interested. By contrast, only 18% of financial professionals believed their clients wanted annuities with lifetime income.

That disconnect is striking. As Tamiko Toland, director of retirement markets at CANNEX, puts it: “For financial professionals who aren’t at least considering annuities, it’s fair to say that they may not be listening to what their clients and prospects are looking for and are missing a significant opportunity to do what’s best for them.”


David Stone is founder and CEO of RetireOne, an independent platform for fee-based insurance solutions, including the Constance CDA.