Press Room
Press Responses

November 2, 2000

Fred W. Frailey
Editor
Kiplinger's Personal Finance
1729 H Street, N.W.
Washington, DC 20006

Dear Mr. Frailey:

The article "Annuity Blues" by Jeffrey R. Kosnett in the November 2000 edition of Kiplinger's magazine seriously shortchanges your readers by conveying inaccurate and incomplete information about variable annuities. Allow us to set the record straight.

Variable Annuities Are Excellent Long-Term Investments

The article asserts that the fees associated with variable annuities make them poor investments, agreeing with the views of one financial planner who says his firm avoids annuities because they don't think "over the long term they are a good investment." Mr. Kosnett apparently misunderstands the power of deferring taxes on an investment's earnings. Tax deferral is one reason variable annuities make a great deal of sense for long-term, retirement-focused investors. As concluded by a recent study by PricewaterhouseCoopers, variable annuities "are frequently a more attractive investment relative to mutual funds for long-term savers." The study's results show that for the average investor, based on actual historical market data, after-tax payouts funded by variable annuity investments are substantially larger than for mutual fund investments for holding periods as short as ten years, and become even larger for longer accumulation periods.

"Cheap" Variable Annuities Are Not for Everyone

The article asserts that a variable annuity makes sense for an investor only if it is "cheap enough." This assertion seriously shortchanges your readers, who deserve to understand that contracts that involve higher insurance charges and surrender fees generally offer two things no-load or "no-frills" contracts may not: additional insurance protections and valuable investment advice.

Insurance Protections. The article asserts that the only benefits provided by a variable annuity in return for insurance charges are "tax breaks and a thin shell of a death benefit." This is not an accurate statement. Variable annuity insurance charges do not pay for tax deferral. Variable annuities enjoy tax deferral as a matter of law. Insurance fees imposed by variable annuities pay for insurance benefits, not tax deferral.

Contrary to what the article implies, death benefits are not a "thin shell" of insurance. The standard death benefit guarantees that if the contractowner dies while still saving for retirement, his or her heirs will receive the greater of the amount of money that was invested or the contract'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 contractowners 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.

When an individual purchases an insurance contract - be it life insurance, disability insurance, etc. - what he or she is really buying is protection against economic loss. However, that loss does not have to be realized for the protection to have value. No reasonable person would say that an individual who purchased a homeowners policy made a poor decision simply because his or her house never caught fire. Hindsight is always 20/20, but, unfortunately, people don't have the benefit of it when making important life decisions.

Lifetime Annuity Payments. Another important feature of variable annuities is the ability to elect to receive annuity payments that are guaranteed to continue for the rest of the contractowner's life, no matter how long that is. With people living longer and longer, this is an important benefit that only annuities provide. And, since variable annuities allow contractowners to base the amount of their annuity payments on the investment experience of underlying equity funds, their payments can increase, even in retirement. While, as your article notes, an investor could receive guaranteed payments by purchasing an immediate variable annuity down the road, with lifespans increasing dramatically favorable mortality experience may decrease annuity purchase rates in the future so that the payments under a contract purchased years from now could be significantly less than under a deferred annuity contract purchased now with more favorable purchase rates.

Other Benefits. Variable annuities offer additional insurance benefits. Principal protection features can be purchased that guarantee a minimum level of annuity payments even if investment performance has been poor. These features can also guarantee that variable annuity payments will never fall below a specified "floor." Several variable annuity contracts even offer long-term care protections.

These optional benefits involve additional charges, but that is exactly our point. Your magazine does a serious disservice to your readers by not informing them about these types of benefits, advising them instead that "cheap" "no-frills" variable annuities are the only ones worth considering.

Investment advice. With the different investment options and insurance protections offered by variable annuities, an investor can tailor a contract's costs, benefits, and investments to fit his or her particular needs. Many investors choose to obtain advice from skilled financial professionals to help them through this process, just as many investors rely on brokers to choose and purchase mutual funds. Financial professionals must be compensated. Profits from variable annuity fees and charges are used to provide that compensation, just as fees and sales charges associated with many mutual funds are used to compensate brokers selling the funds.

Variable Annuities Can Be Entirely Appropriate Investments for Qualified Plans

The article criticizes the use of variable annuities to fund tax-qualified retirement plans, asserting that this use results in "stiff fees for little benefit." We disagree. As we previously discussed, variable annuities offer a wide range of benefits not offered by other investments, including the death benefit and the right to elect lifetime income payments.

On a related note, the article indicates that the National Association of Securities Dealers (NASD) recently issued guidelines that provide that financial advisers should disclose to their clients that the tax-deferral feature of variable annuities is unnecessary in a qualified retirement plan. The article fails to point out that these guidelines also identify benefits provided by variable annuities that can make sales within tax-deferred retirement plans entirely appropriate. In short, the NASD guidelines recognize that the suitability of a variable annuity for any customer is a factual determination that must be made for each sale.

Additional research may have revealed to Mr. Kosnett that annuities were specifically designed for the qualified market and have been recognized by Congress in specific sections of the Internal Revenue Code to be a legitimate funding vehicle for qualified plans. Their use in this market is both long-standing and widespread.

No product is perfect for everyone, and investors should carefully consider where to invest based on their individual needs and circumstances. To assist investors in making these critical decisions, an article should present a balanced discussion of the pros and cons of any investment. Thoughtful consideration of this type of balanced information has led millions of Americans to say a resounding "yes" to variable annuities for their retirement planning.

If we can provide Kiplinger's with additional information to include in future articles on variable annuities, please don't hesitate to contact us.

Sincerely,

W. Thomas Conner
Vice President and General Counsel
NAVA
Reston, VA