Press Responses
April 14, 2000
CBS MarketWatch.comLetter to the Editor Sent via e-mail: newsroom@marketwatch.com To the Editor: We strongly disagree with many of the assertions contained in Marshall Loeb's article "Are Annuities Too Good to be True?" featured on CBS' MarketWatch.com, March 20, 2000. We thought it would be helpful to set the record straight and to offer NAVA as a resource for future articles about annuities. The article begins by correctly noting that tax-deferred earnings and guaranteed lifetime payments are attractive features of variable annuities. In fact, these attributes are two of the most important reasons why millions of Americans have bought variable annuities to fund their retirement. The article then goes on to state, however, that "most people can get all those benefits and more at far less cost with other investments." Really? Perhaps Mr. Loeb would be so good as to tell us what those other investments are. We aren't aware of any. Only annuities offer the unique combination of benefits Mr. Loeb describes. We certainly agree with Mr. Loeb that people should contribute the maximum amount to their qualified retirement plans (many of which, we might add, are funded by annuities). But his statement that investors should "carefully consider" tax-free municipal bonds as an alternative to annuities is clearly erroneous. Muni-bonds do not provide the insurance benefits that variable annuities offer. In addition to the guaranteed lifetime income feature Mr. Loeb mentions, variable annuities provide valuable beneficiary protection in the form of a death benefit. The standard death benefit provided by variable annuities guarantees that if the policyholder dies while still saving for retirement, his or her heirs will receive the greater of the amount of money that was invested or the policy's value at the time of death. Many variable annuities go even further and offer "stepped up" benefits that lock in investment gains every few years or even every year. The guaranteed death benefit gives policyholders the confidence to invest in the stock market, which is important in order to keep pace with inflation, since they know that their family will be protected against financial loss in the event of an untimely death. Moreover, compare the 5.8% return Mr. Loeb cites for municipal bonds with the returns variable annuities can offer. According to Variable Annuity Research & Data Service (VARDS), the average total return over the last five-year period for variable annuity contracts investing in equity funds was 20.97%. This is the net tax-deferred return, after the deduction of all contract expenses. You do your readers a serious disservice by suggesting that the return on municipal bonds compares favorably with that of variable annuities, which have a full range of investment options and allow tax-free transfers between those investment options to meet changing market conditions. We must also disagree with Mr. Loeb's description of the commissions charged on annuity sales. Mr. Loeb writes, "There are no front-end loads. Instead, the sales commission, ranging from 3 percent to 8 percent of your investment, is taken out of your account's earnings…Most companies also sock you with big 'surrender' fees for substantial withdrawals. These fees can run as high as 15%…" First of all, sales commissions are not taken out of account earnings; 100% of the investment works immediately for the owner. The insurance company pays the commission up-front and recoups the expense over time out of its profits from contract fees. Secondly, variable annuities do not impose surrender fees of 15% (nor, for that matter, do any fixed annuities we're aware of). Variable annuity surrender fees generally range from 0% to 7% in the first year and decline by 1% each year after that. Finally, we must disagree with Mr. Loeb's conclusion that annuities are appropriate for "only a small minority of investors." Mr. Loeb would probably be surprised to learn that the vast majority of annuity holders are satisfied customers. The Gallup Organization recently conducted a survey of annuity holders and found that 86% feel they have saved more with an annuity than they would have if the annuity had not been available. And 91% agree that annuities are an effective way of saving for retirement. So who should buy a variable annuity? People who are long-term, retirement-focused investors, who have maxed out their qualified plan contributions and seek additional tax-deferred growth. People who want an income in retirement that will last as long as they or their spouse are alive. People who want to benefit from the investment gains found in the stock market, but want a death benefit to protect their beneficiaries. Sounds like a lot of people would benefit from a variable annuity. And, indeed, millions of Americans have. Sincerely,
Mark J. Mackey
President and CEO
National Assn. for Variable Annuities (NAVA)
Reston, VA
© 2006 NAVA National Association for Variable Annuities. All Rights Reserved.
Phone: 703-707-8830 · Fax: 703-707-8831