The more annuity bells and whistles you buy... the worse your performance will be.
Response: Thanks so much for the question Sam and here's the straight scoop. First of all the underlying fuel for a disgruntled owner of anything including an annuity is their expectations. When you sit in front of someone who is talking to you about market like returns with protection and bonuses and guaranteed income etc. people tend to get excited. What I have found in my 25 years of experience is that when it comes to annuities in general, consumers are sucked in by the flashy enticements like bonuses, income riders, roll up rates that they typically think is a guaranteed return and Death Benefit Riders. Consumers love the features and things that make these products sound fantastic... the downside is that they rarely if ever understand the affect of having these features included in their contract on the underlying performance of their investment. Investors don't typically complain about the 10% bonus a year or two later... what they complain about is the fact they learned some new terminology like what a cap is or that there was a fee for those riders and a vesting schedule for that bonus.
When I sit down with someone to discuss an annuity that they own or we are talking about putting funds into a new contract the very first thing that we talk about is the use of those funds. Are we buying an annuity for appreciation and growth or to produce income. Often those two varieties will lead us down two very different paths. I see so many annuity contract owners who come to me for an Annuity Report Card® who are unhappy because of their returns, but don't understand the very things that excited them about making the purchase is the same items that are causing their funds to perform poorly.
The lesson of the day is when it comes to annuities as well as so many other things in life... "you can't have your cake and eat it too". If you are buying annuities laced with additional costly features, don't expect your investment return to knock your socks off. Most often you can have one or the other but not both.
Thanks again for the question Sam.
Response: Thanks so much for asking your question Hussaim... and a great question it is. The toughest part of our job as financial coaches is managing the expectations of our clients. Wouldn't the world be wonderful if you could buy a product that offered you principal protection, 100% liquidity, no fees and a 12% guaranteed return. In the real world that product doesn't exist, but having had conversations with investors who have sat through some indexed annuity sales pitches, you would think it did.
Having said that, Is it possible to experience double digit returns in an indexed annuity?... yes you can. However, it really comes down to whether you own a capped annuity or an uncapped annuity and it obviously depends on the underlying index and it's performance as well. Let's face it, if you own a contract that has a 4% earnings cap, then you should never expect to earn a dime more than that. Just like any other investment vehicle where investment performance is unknown and unpredictable... indexed annuities are no different. There is no way to know or predict what your contract will do, but if you own a capped annuity... you will certainly know what it will not do and that's a pretty important bit of information you should have in your pocket BEFORE you purchase one of these things. So how do you give yourself the best shot at success? Without mentioning specific products.. try looking for:
Thanks so much for the question Hussaim and best of luck in your search.
Response: Thanks so much for the question Pam. I know there is a lot of frustration in owning an investment vehicle that you think you understand or that you buy because of the "the pitch" and then you learn something about it later that wasn't quite clear to you. Riders of any kind, whether they are income riders, long term care riders or death benefit riders are without a doubt the most misunderstood and least explained "add-ons" to an annuity and they can also be the most costly.
A death benefit rider is like owning a small insurance policy inside your annuity contract that guarantees your beneficiaries a certain return on your investment regardless of how your actual investment performs. These are very popular with the sale of variable annuities and the pitch is "protecting your heirs and their inheritance in case you happen to pass away during a down market... they aren't penalized." Some call it a "peace of mind" feature... however the catch is the fee especially with the already expensive variable annuity. I'll give you an example. I prepared an Annuity Report Card this past week for someone who owned a variable annuity for the previous seven years. Her complaint to me was that she was unhappy with the performance and she wanted to better understand why. After dissecting her contract I'm going to show her when we meet this week to review this report that she not only had a Death Benefit Rider attached to her contract but also an Income Rider as well. She was paying 1.50% in M&E charges, .75% in asset management fees .15% in admin charges and a whopping 2.5% in rider fees for both riders. Total fees for her ownership of this annuity is 4.90%. Her total return on investment net of those fees 4.17%. My opinion is that if you are purchasing a variable annuity on the integrity of the underlying performance of the managers that you are already paying... why do you need this extra expensive insurance policy. I get the untimely death thing and I'm sure there have been cases where it has paid off for the consumer, however, how about the fact that these are being sold, or should be sold as long term investment vehicles. If you are paying 1.00% in fees to guarantee a 4% return on a vehicle that long term should do a multiple of that... where's the attraction? Are you betting that your portfolio managers will not return to your heirs 3% or better performance?
"I purchased a product that does not mature. I can never withdraw the full amount from my account... EVER. I can however annuitize or withdraw the money over a 10 year period. I complained about the sales pitch and misrepresentation of the product because I would never buy anything that I could not take my money out of after so many years. The Rep informed me I was given and signed a Contract. Be careful - when an Advisor tries to sell you something - make them show the points in writing they use as product benefits. Always ask what happens when you die - make them show you that info in writing as well".
Response: All I can say about this is I'm sorry. As an industry we typically chase after the advisor and blame only the sales practices involved in this type of scenario. My opinion is that that is only the tip of the iceberg here. The root of the problem is the fact that this type of contract, when presented to the states for approval to be sold should be denied immediately and without question. A product with an never ending surrender charge and forced annuitization should never make it to the kitchen table as an option for anyone.
I have run across this product before and interestingly enough I had a perspective client ask me about this company and a similar product just this past week saying "It looks like a pretty good deal... what are your thoughts" This is a classic example of how individuals don't get past the sales pitch and dig a bit. This is exactly the reason why I employ my Annuity Report Card®. I actually take it a step further and not only prepare the Annuity Report Card® but also show the breakdown of the annuity that I am comparing it to. Please feel free to check out the Annuity Report Card® I did for this case.
As far as what you can do at this point if you find yourself in this situation.
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.