30 BARRON’S July22,2019
If You’re Looking for:
Tax-Deferred Savings
Like a 401(k), annuities allow your assets
to grow tax-deferred and can’t be accessed
without a 10% penalty until age 59 ½. With-
drawals are subject to income tax.
Traditional variable annuities create an
opportunity to significantly expand tax-de-
ferred savings. There is no specific maxi-
mum investment, but it is usually many
times higher than the 401(k)’s $19,000 limit.
Some variable annuities charge exorbitant
fees that can erode the benefit of the tax de-
ferral. But some, like Nationwide Insurance’s
Monument Advisor Variable Annuity and
Jackson National Life Insurance’s Elite Ad-
visor II are cheap—$240 a year for any size
investment—and have a broad assortment of
investments, including alternative strategies.
As with all categories of annuities,
there’s the good, the bad, and the ugly. Take
time, and find help from a trusted advisor,
to find the best for your circumstances.
Y
EARS AGO, AMIR KHAN’S MOTHER CREATED A SPECIAL-NEEDS TRUST FOR HIM AND NAMED
his sister, Sophia Victor, as trustee. Amir, 41, has Down syndrome.
After their mother’s death in 2013, Victor was convinced by an insurance agent
to use trust assets to buy two variable annuities, one to begin paying later in life.
It wasn’t until it was too late—the assets were locked into two contracts with penalties
for early withdrawals—that Victor learned from an independent financial advisor that she
had been sold a couple of high-fee annuities that were ill-suited for a person with Down
syndrome.
Income-generating annuities can be effective tools for folks concerned about outliving
their money. But their value proposition is about longevity—the longer you live, the more
value an annuity has because it continues paying long after your principal and any gains
have dried up. For folks who die early, an annuity’s value never has a chance to kick in.
For someone with Down syndrome, whose average life expectancy is age 60, annuities
are like flood insurance for a mountaintop property.
“It would be almost a miracle that Amir’s life expectancy would be so long that he
would even get his principal back,” says Allan Roth, an advisor at Wealth Logic in Colo-
rado Springs, Colo., who reviewed the annuities for Victor. “This is probably the ugliest
and most inappropriate situation I’ve seen with an annuity. It tugged at my heart.”
Two years ago, the annuity industry got off the fiduciary hook when a sweeping Labor
Department rule requiring annuity sellers to have clients’ best interests in mind was va-
cated—meaning, scrapped.
But annuity companies had spent more than a year and significant resources prepar-
ing for the new rule, and a number of their changes stuck. For instance, there are now
numerous fee-based annuities alongside the traditional commission-based contracts.
Insurers have been targeting independent advisors—who aim to remove conflicts of in-
terest by charging annual fees rather than collecting commissions—with educational and
marketing efforts around some of the cleaned-up products.
There is even a hint at a democratization of the industry. Blueprint Income is a new
online marketplace for fixed-income annuities that allows investors to shop and compare
products and establish a contract with a minimum of $100 and in 24 hours, rather than
the $5,000 to $10,000 minimums in the traditional two- to six-week, paper-heavy tradi-
tional process.
While there has been some progress since Victor bought the annuities for her
brother, “some products are mind-numbingly complex. They can, in theory, be great, but
people often don’t know what they’re buying,” says David Blanchett, head of retirement
research at Morningstar. And the door is still wide open for unscrupulous agents to sell
products that are a poor fit for clients.
Investors need to be cautious and inquisitive. Understand how the person selling the
annuity is being compensated, says Mark Cortazzo, senior partner of Macro Consulting
Group and founder of Annuity Review, which does analyses of variable annuity con-
tracts. Ask if your goals can be met by other types of annuities. “The feature that’s at-
tractive to you may be on other chassis—maybe on products that are cheaper or more
liquid,” Cortazzo says. Be sure you understand a contract before buying. Finally, if
you’re not getting clear answers from the person selling the annuity, move on or have an
independent advisor review the contract.
“Annuities aren’t bad. They’re not great, not terrible,” Cortazzo says. “They’re a tool
that can be an effective for the right situations, but must be carefully considered.” —K.H.
What to Watch Out for in Annuities
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OCTOBER7,2019|NEWYORK,NY