Press Responses
April 5, 2000
Letter to the EditorBarron's
200 Liberty Street
New York, NY 10281 To the Editor: "Just Say No To Annuities," by David Franecki in Barron's March 27th edition correctly notes that tax deferral and the ability to make unlimited contributions make annuities excellent retirement plans. It's too bad Barron's did not have access to better data on mutual fund fees or appropriate methodology for comparing variable annuities to mutual funds. Perhaps then Barron's would have avoided providing inaccurate information to its readers. Comparison of VAs to Mutual Funds According to Morningstar, the average mutual fund expense is 1.38% not .83% as stated in the article, which makes the real average cost differential between mutual funds and variable annuities only .74%. For this modest incremental cost, variable annuity owners receive a unique combination of benefits that most retirement-focused Americans want and need: lifetime income payments, beneficiary protection in the form of a death benefit and guaranteed insurance fees. The cost of these benefits is a small price to pay for the protection that is provided. The example cited in the article is equally flawed. The article compares a $100,000 investment in an index mutual fund to one in a variable annuity. This is hardly an "apples to apples" comparison for many reasons. First, the example compares the least expensive type of mutual fund-an index fund with annual fees of .20%-with a variable annuity investing in more expensive funds. A fairer comparison would have assumed the variable annuity was also funded by a low cost index fund. The results of such a comparison are dramatically different. PricewaterhouseCoopers LLP (PwC) recently conducted a study comparing the after-tax performance of variable annuities to mutual funds using historical investment returns, fees and tax brackets under a variety of scenarios. PwC concluded that for the average variable annuity and average mutual fund investment, based on historical investment performance of funds for an 11-year period (1987-1997), the after-tax payouts funded by variable annuity investments are substantially larger than mutual fund investments for holding periods as short as 10 years. Second, the example assumes a buy and hold strategy for 20 years. This is hardly a real world scenario. Based on data from the Investment Company Institute, the trade association representing the mutual fund industry, the average holding period for fund investments is from three to five years. Mutual fund investors are subject to taxes on any capital gains realized on the sale, exchange or redemption of their mutual fund shares, and these taxes eat away at their investment gains. Variable annuity holders, on the other hand, can exchange among subaccounts as frequently as their investment needs and market conditions dictate, since there are no tax consequences from these exchanges. This is an important advantage that variable annuities have over mutual funds, but it is ignored in the example. Third, the example ignores the fact that variable annuities provide valuable insurance benefits-benefits you don't get with an index fund. The death benefit is dismissed because, according to the article, the odds of collecting it are a "longshot." This statement demonstrates a fundamental lack of understanding about the nature of insurance. When an individual purchases an insurance contract-be it life insurance, disability insurance or whatever-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 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. The article similarly dismisses the contract owner's ability to annuitize the variable annuity contract because "few annuity owners ... have chosen to annuitize, largely because the payout system is rigid." This ignores the fact that most variable annuity owners are still working and saving for retirement and are not ready to begin collecting income from their variable annuity. With respect to the so-called "rigid" payout system, many variable annuity contracts now offer payout features with increased flexibility and liquidity-including the right to withdraw more from their account than the amount of the annuity payment. Use of VAs in Qualified Plans Finally, with respect to using variable annuities to fund qualified retirement plans, the article claims that "investors have been hornswoggled into paying exorbitant fees ... to get tax-deferred status in an account that's already tax deferred." We strongly disagree with this statement. Variable annuities enjoy tax deferral as a matter of law. Investors do not pay for tax deferral in a variable annuity. The fees imposed by variable annuities go to pay for the insurance benefits the contract provides, not tax deferral. No product is perfect for everyone, and investors should carefully consider where to invest based on their individual needs and circumstances. Thoughtful consideration has led millions of Americans to say a resounding "yes" to variable annuities for their retirement planning Sincerely,
Mark J. Mackey
President and CEO
National Association for Variable Annuities (NAVA)
Reston, VA
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