February 6, 2004

 

 

Letters to the Editor

The Wall Street Journal

4300 Route 1 Ridge Road, Bldg #1

South Brunswick, NJ  08852

 

To the Editor:

 

We are writing in response to the recent article entitled "How Variable Annuities Can Gnash Investors" by Theo Francis, which appeared in The Wall Street Journal on February 6, 2004.  We are concerned that the article provides an incomplete and inaccurate analysis and could, therefore, potentially mislead your readers about variable annuities, a valuable financial product that is helping Americans prepare for retirement.

 

The article is highly critical of the “tactics used by brokers attracted by steep commissions”. The variable annuity industry takes the issue of ethical sales practices very seriously.  We agree that registered representatives have a responsibility to be knowledgeable about the contracts they are offering, and are recommending them based upon full disclosure and proper suitability determinations.  And, we certainly support state and federal regulators in their efforts to investigate and discipline those guilty of unethical sales practices.  However, we believe it is incorrect to imply, as the article does, that unsuitable sales are widespread throughout the industry. We strongly believe that any such sales represent isolated instances.

 

The article cites two instances of people losing money in their variable annuities. The primary reason that many people saw their investments decline in value during 2001 and 2002 was the bear market which affected all equity investments, not just variable annuities.  While not commenting on the merits of any particular case, we note that it is not unusual for the number of complaints to increase during declining markets when people have lost money.  And, just because a complaint has been filed does not mean that any wrongdoing has actually occurred.

 

The vast majority of annuities have been sold to investors who believe they have benefited from this tax-deferred retirement savings vehicle.  According to a survey conducted by the Gallup Organization, 89% of annuity owners agree that annuities are safe and secure, and 91% agree that annuities are an effective way of saving for retirement.  This is a track record of which any industry would be proud.

 

The article states that all too often variable annuities have “big drawbacks for the investors that buy them.”  We disagree.  Variable annuities offer a unique combination of benefits that can make them excellent investments for retirement-focused Americans.

 

First, they offer a wide range of tax deferred investment portfolios, from stock funds to more conservative investments such as bond funds, balanced funds and money market funds. In addition, most variable annuities offer fixed interest rate accounts.

 

Second, variable annuities also offer valuable insurance benefits that are not available with other investments and which are largely ignored in the article. For example, many variable annuities offer living benefits that offer protection against downside market risk.  Some contracts guarantee that the contract value will be at least equal to the initial investment after a specified period of time, such as 10 years, regardless of market performance. Others guarantee the systematic withdrawal of a certain percentage of premiums annually (e.g., seven percent) until the original investment has been completely recovered, again regardless of market performance.

 

The article also completely ignores another important insurance benefit offered by variable annuities, the right to elect payments that are guaranteed to last for the rest of the policyholder’s life (or for the lives of the policyholder and his or her spouse, if so elected), no matter how long that is. Investors can tailor a payout strategy that meets their preferred level of risk, choosing between fixed income payments, variable income payments, or a combination of the two. People are living longer and Social Security and pension plans are projected to play a diminishing role in generating a retirement income stream. In this environment, the value of this guaranteed lifetime income benefit cannot be overstated.  Annuities are the only financial product that provide this guarantee.

 

The article also criticizes the use of variable annuities in IRAs and other tax qualified plans.  The reason many people use variable annuities to fund qualified plans is to obtain the insurance benefits discussed above. Additional research may have revealed to Mr. Francis that variable annuities were specifically created and designed for the qualified market and have been recognized by Congress in specific sections of the Internal Revenue Code to be legitimate funding vehicles for these plans.  Their use in this market is both long-standing and widespread.

 

Finally, the article states that surrender fees on premature withdrawals can be steep—as high as 17%. There are no variable annuity contracts that we are aware of that impose surrender fees as high as 17%.  In fact, most surrender fees are in the 5-7% range and decline 1% per year until they disappear. It is also worth noting that it is not unusual for financial products to impose charges for premature withdrawals.

 

No product or investment is perfect for everyone, and investors need to fully understand their alternatives so that they can make choices based on their individual needs and circumstances.  We share a common goal of educating the public about variable annuities and trust our response will assist you in this effort.

 

Sincerely,

 

 

Mark J. Mackey

President & CEO

 

cc: Theo Francis