Saturday, October 22, 2011
Collecting an Annuity is the Easy Part
These insurance products have big appeal for retirees and nervous investors, but you still can’t buy them without paperwork and phone calls.
Annuities have been on a roll lately because they promise protection from bad markets and offer guaranteed payouts, regardless of economic conditions. With so many people reaching retirement age, the appeal is understandable. A Barron’s June 20 cover story on the best annuities generated so much online discussion and inquiry, we decided to learn how intrepid electronic investors can research and purchase annuities.
What we found was disappointing.
Today’s online annuity market reminds me of the bond market of eight to 10 years ago: You can find tons of descriptions, and even use some evaluation tools to find an annuity that seems to meet your needs, but buying usually requires a chat with an advisor.
One reason for this is that annuities are, in essence, an insurance product, rather than a security, which means they fall under different regulations, many of which vary by state. Ian Lundahl, a senior analyst at consultant Corporate Insight (http://www.corporateinsight.com) who specializes in annuities and life insurance, says, “It’s going to be tough for a retail investor to set up and buy an annuity online without talking to a human.” Lundahl, whose firm specializes in financial-customer research, doesn’t believe that purchasing an annuity will become a fully online experience for at least another five years.
Lundahl notes that annuities can be a big-ticket item and says that they’ve gone through some “rough patches” with regulators worried about sales practices. As a result, insurers want to make sure that their advisor units are “prepared to answer questions and perform certain tasks that you can’t do online by yourself.” Regulators tend to focus most closely on whether a particular annuity is suitable for a particular investor, and that an investor has completely answered all of the required questions before signing up.
I MUST ADMIT TO some skepticism about these products. I watched some relatives deal with the bankruptcy of the insurance company that held their annuities back in the late 1980s. When I took a look at the contract they had signed, I saw a lot of fees and charges that had reduced their initial investment considerably.
As a baby boomer myself, with retirement looming a decade from now, I circle back to check out annuities every couple of years. But I’m put off by the hard sell, as well as the feeling that I can generate more income investing on my own. Frankly, I would be more likely to consider an annuity if I could complete all the steps online, avoiding the possibility of talking to an advisor who sounds like, well, an insurance salesman.
There is now a wide variety available; in our June feature, contributing editor Karen Hube found approximately 1,600 iterations of the product. Your choices include variable annuities, whose growth fluctuates based on the underlying investments, and fixed annuities, which are tied to a specific interest rate. Your payouts can begin immediately, or be deferred to a later date. You can also choose the length of time that the annuity will generate monthly income, and purchase riders to ensure that your heirs will receive payments after you’re gone.
ROBERT SCHAFFER, assistant vice president in the annuities division of USAA (http://www.usaa.com), says he understands my misgivings, but believes his firm’s products are straightforward and can help anyone who wants to guarantee a certain amount of income for life. Shaffer, a former Marine, explains that annuities originally were designed as bond substitutes because that market could be tough for retail buyers to negotiate.
USAA’s Website, open to active or retired military personnel and their families, allows users to calculate the size of an annuity, based on either the desired monthly payout or the sum available to invest. To purchase the annuity, however, you must call a representative.
USAA sells two flavors of fixed annuities: one that generates an immediate payout and one that defers the payout. For the former, an investor would deposit a lump sum immediately and start drawing a monthly check. For the latter, an investor would make regular investments and build up the account. There are simple-to-use tools on the USAA Website that guide a member through the process of figuring how much to invest.
Fidelity (http://www.fidelity.com) is one of the few online brokers that also gives customers access to annuities. Fidelity has its own suite of variable annuities that it packages and sells; customers who prefer to buy a fixed annuity are directed to a partner firm.
On the Fidelity site, clicking on “Investment Products” and then the “Annuities” tab directs you to a page with links to descriptions of the various Fidelity products, as well as a link to the site’s Income Strategy Evaluator. The latter requires either a Fidelity account or a free login that lets you play with the tool without opening an account. You answer questions regarding your assets, plans for savings in the future and the expenses you need to cover in retirement, and a personalized strategy is presented. The paperwork needed to open an annuity can be prefilled, based on data already stored on Fidelity’s site, but you still must print it all out, sign it, and send it in. Or you can telephone an advisor.
TIAA-CREF (http://www.tiaa-cref.org), best known as a pension provider for the education and medical professions, also offers individual annuity contracts. The contributions are made from after-tax income. It offers both fixed and variable annuities; availability depends on your state of residence. The firm offers a lot of tools for research and information online. An advisor handles the paperwork, though a client’s signature is required, says Jeremy Ragsdale, a managing director in the firm’s after-tax annuity group.
Vanguard (http://personal.vanguard.com) also has annuity resources on its Website, though they aren’t as developed as Fidelity’s. The Vanguard site works hard to convince you to move any existing deferred variable annuities you have to the fund giant to save on fees.
But for now, at least, research is about as far as you can go online.
Published in Barron’s, October 17, 2011