Should Annuities be Used in Retirement Accounts?

[finadvnj]

Not according to to this article:
"California Couple Sues VALIC Over Its Annuity Sales Practices"
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20100117/REG/301179974&ht=california%20couple

This article addresses the same concern:
"Redundant Fees Destroy 403(b) Retirement Assets: What the Insurance Companies Do Not Want You to Know"
http://www.skloff.com/Articles/RedundantFeesDestroy403%28b%29RetirementAssets-SFG-403bwise-030607.pdf


Regards,
Aaron Skloff, AIF, CFA, MBA
CEO - Skloff Financial Group
Phone: 908-464-3060
http://www.skloff.com
401(k) LinkedIn Group Manager

[Lucullus]

To the Editors of Investment News.
I read Darla Mercado’s article entitled "California couple sues VALIC over its annuity sales practices" (Friday, Jan 22^nd, 2010) with increasing sadness.

Investment News has, in the years I’ve been reading it, proven to be a source of timely and usually accurate news.

This article is, alas, something very different.

Did you ask Ms. Mercado to write an editorial and mistakenly put it in the news section or are you and Ms. Mercado unaware of the differences between polemical argument and objective news reporting?
For example, Ms. Mercado writes “In a class action filed in U.S. District Court in Arizona on Dec. 21, the Halls alleged that VALIC and affiliate Variable Annuity Marketing Co. trained its agents to target 403(b) plan participants as sales prospects for variable annuities even though the products aren't suited for such retirement plans”.


A careful reporter would have written “..for variable annuities even though, they allege, these products aren’t suited for such retirement plans” to make clear that the conclusion (that variable annuities are not suited for such retirement plans) is the plaintiff’s allegation and not established fact.
In fact, variable deferred annuities can be entirely suitable for use in retirement plans, if the insurance features of those annuities are both wanted and needed by the plan participant.

(Ms. Mercado did not specify that the contracts in question were variable deferred annuities, but, as the purchasers are not yet retired, it is reasonable to assume that they did not buy immediate annuities).

This is not to say that VAs are always appropriate in retirement plans, merely that they can be.

Their appropriateness always depends upon what the individual

participant wants and needs.
But that’s not what Ms. Mercado said.

She declared that “Both variable annuities and qualified retirement plans grow on a tax-deferred basis, so variable annuities don't provide any tax advantages when included in such plans. It is also a costly decision because clients are also paying fees on the variable annuities and face surrender charges for untimely withdrawals.”
The CA couple bringing this lawsuit have alleged that the VAs were unsuitable because they offer no tax advantages.

Of course they don’t!

Neither would fixed annuities.

Or mutual funds.

Or stocks, or bonds, or any other type of investment.

That’s because the

tax treatment of 403(b) retirement plans is consistent, regardless of the type of property used to fund those plans.

These plaintiffs claim that the VALIC agent made “material misrepresentations” and failed to disclose material facts.

That may mean that the agent suggested that a variable annuity offers tax advantages (compared to other funding vehicles) when used in a qualified retirement plan.

If that’s so (that the agent did, in fact, make such a suggestion), then the agent is guilty of misrepresentation, if not of criminal ignorance.
But that doesn’t mean that the plaintiff’s claim (that variable deferred annuities are, ipso facto, unsuitable for use in qualified retirement plans) is factual.

It’s just a claim, and a very weak one at that.

But Ms. Mercado reports is as fact.
Ms. Mercado also concludes that “It is also a costly decision because clients are also paying fees on the variable annuities and face surrender charges for untimely withdrawals.”

Does she wish us to believe that fees are charged only by variable annuities and that only variable annuities impose surrender charges?

Can we say “B shares”?

For what benefits are the fees in a VA charged?

Ms. Mercado does not say.


Do the plaintiffs in this case complain of the fees and surrender charges of the VA or is the sentence quoted above merely Ms. Mercado’s opinion?

We cannot tell.
As a long-time reader of Investment News, I respectfully suggest that you review your editorial and news policies to ensure that sloppy, judgmental opinion pieces aren’t offered to readers as news stories.
Very truly yours,
John L. Olsen, CLU, ChFC, AEP

[Lucullus]

The formatting in my prior message was due to the text management software used by this forum. I tried editing it but the software has a mind of its own.

John Olsen

[Bradly T.]

Agreed, it is very disappointing that both the "News" and Mr. Skloff present such an uninformed position. Annuities have always been, by both functional and tax code definitions, RETIREMENT PRODUCTS/ACCOUNTS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! What a stupid argument for the plaintiff side...and class action to boot. The so called "excessive fees" pay for mechanical functionality, custodial fund selection and due dilligence, death benefits, and lifetime income options NOT available in any other retirement product. Did the plaintiffs not see the name of the company on all the literature, applications, and statements....VALIC?? Has TIAACreff been sued too?? Wasn't the very first deferred annuity designed for teachers in the 50s? Aren't 85% of ALL 403b accounts in annuities? Why not sue the state and school districts that have allowed these monstrous products to roam the halls of schools for decades?


Mr. Skloff must fear the competition is moving in on his turf....401ks. And they are. To the betterment of plans, participants, and advisors. Get over it.

[Lucullus]

Mr. Skloff says, in his article entitled "Redundant Fees Destroy 403(b) Retirement Assets: What the Insurance Companies Do Not Want You to Know", that "If approached by an insurance salesperson, ask the agent why they would recommend putting a tax sheltered product (an annuity) inside of a tax shelter plan like a 403(b). You will likely
receive a blank stare."

Hmm. My response to such a query would not be a "blank stare", but something like "you're not putting a tax sheltered product inside a tax shelter. The tax deferral that would apply to an annuity if it were held in a taxable account isn't relevant and does not apply when that annuity is held in a tax-deferred account like a qualified plan or IRA, just as the Long Term Capital Gains treatment that would apply to non-dividend paying stock if it were held in a taxable account isn't relevant and does not apply when it's held in a tax-deferred account. In both cases, the tax treatment that applies to those investments when held in taxable accounts applies ONLY when they're owned that way. By contrast, EVERY investment held in a qualified retirement plan or non-Roth IRA gets tax deferral and ALL distributions are taxed as Ordinary Income. That's just basic tax law".

To suggest that a variable annuity is unsuitable in a retirement plan because you "waste" the tax deferral it would get if you held it outside that plan is like saying that non-dividend paying stock (or a mutual fund investing in such stock) is unsuitable in a retirement plan because you "waste" the Long Term Capital Gains taxation you'd get if you held it outside that plan. A stock you want to own doesn't get worse if you own it inside your retirement plan. Neither does an annuity.

Now, if I were asked Mr. Skloff's question by Mr. Skloff, or anyone else who holds himself out as an "Accredited Investment Fiduciary" (AIF), an MBA, and a Chartered Financial Analyst (CFA), my response might well be.... a blank stare. Followed by "You are kidding, right?"

- John Olsen

[Tad Borek]

I read that article yesterday and it looked to me like a restating of the complaint filed in this class action. On re-reading it, I still think that, mostly - the paragraphs begin "The Halls alleged...", "The Halls argue...", "The complaint accuses..." which is clear enough for me.

Except one: "Both variable annuities and qualified retirement plans grow on a tax-deferred basis, so variable annuities don't provide any tax advantages when included in such plans. It is also a costly decision because clients are also paying fees on the variable annuities and face surrender charges for untimely withdrawals."

Unclear whether that's also from the complaint (a continuation of the prior paragraph), or if that's IN editorializing. If the latter, agree it sounds overly broad...which is why on first read I assumed it came from the pen of the class-action attorney. Maybe someone has seen the case and can comment - it's Hall et al v. The Variable Annuity Life Insurance Company et al, filed December 21, 2009 in Arizona District Court.

John, my general observation on IN isn't so much bias towards a specific product, it's that some of articles read like reformatted press releases, most likely because they're based on press releases - that's common in trade rags. Perhaps this is another of them.

-Tad

[Lucullus]

This reminds me of a CA case where plaintiff alleged that he bought a deferrred annuity which required that he wait until age 115 to take annuity payments. Evidently, plaintiff's counsel either could not read a contract or assumed that no one else, including opposing counsel, could. It is not unusual to see a deferred annuity contract that requires that payout commence no later than a certain age. But I've never seen a deferred annuity contract that forbade annuitization until an advanced age. Most allow annuitization at any time after the first year or two.

In that case, the plaintiff wanted the court to believe that the maximum permissible age to commence payout was the minium permissible age to commence payout.

Such silliness is not unusual, unfortunately.

It is possible that the TIAA agent did, in fact, suggest that there's a tax advantage to funding your 403(b) plan with a deferred annuity. That's wrong, of course, and such a sales pitch is incredibly dumb - not least, because it's easily disproven. Some agents say really dumb things. I've never personally witnessed an agent's making that claim, but I've seen a LOT of misrepresenations - some deliberate; some not.

But misrepresentation exists on both sides of the annuity debate. Some critics of annuities simply don't know what they're talking about. We've all heard that when you buy an annuity, you pay for tax deferral. That's like saying that, in 2009, if you bought a car, you were paying for a tax credit, or, if you buy a quart of milk in many states, you're paying for the non-sales taxable nature of retail purchases of basic foods.

Perhaps the most widespread misconception about annuities is the notion (often, unspoken and merely assumed) that their utility can be fully appreciated using conventional INVESTMENT logic and math. 'Taint so. For example, it is not possible to compute the IRR on an immediate life annuity unless one knows the annuitant's date of death. But even if one knew that, the computed IRR is of limited use in appreciating the value proposition of that annuity. Because one doesn't buy an immediate annuity because of his perceived "return on investment". One buys it because one requires an income stream that is certain in amount and (in the case of life contingent contracts) cannot be outlived.

To those who insist, for example, that in buying a SPIA, you're "locking in today's interest rate", I usually respond by asking "what is the internal rate of return on your auto insurance"?

John Olsen

[finadvnj]

Another good article:

"A big part of the pitch, however, is the death benefit. If you die and your account has dropped below what you originally put in, the insurance company makes up the difference to your beneficiary."

"But don't be fooled: The death benefit was triggered in only 1% of all policies from 2002-2004, according to Limra International, an insurance-industry research group."

http://www.smartmoney.com/investing/basics/Annuities-Alternative-Investments-and-Annuities-at-SmartMoneycom-17546/

Regards,
Aaron Skloff, AIF, CFA, MBA
CEO - Skloff Financial Group
Phone: 908-464-3060
http://www.skloff.com
401(k) LinkedIn Group Manager

[Bob H]

Vig? Is that you?

[debaser]

Vig? Is that you?

Can't be. There aren't 8 different fonts and font sizes in his response.

[debaser]

Another good article:

"A big part of the pitch, however, is the death benefit. If you die and your account has dropped below what you originally put in, the insurance company makes up the difference to your beneficiary."

"But don't be fooled: The death benefit was triggered in only 1% of all policies from 2002-2004, according to Limra International, an insurance-industry research group."

http://www.smartmoney.com/investing/basics/Annuities-Alternative-Investments-and-Annuities-at-SmartMoneycom-17546/

Regards,
Aaron Skloff, AIF, CFA, MBA
CEO - Skloff Financial Group
Phone: 908-464-3060
http://www.skloff.com
401(k) LinkedIn Group Manager

You do realize most people buy annuities in their QPs because of the living benefits, right? [removed, first warning, see forum etiquette guidelines. Please stick to the subject matter and do not attack other posters]

[Bradly T.]

It's too bad when so-called "professionals" use deceit and half truths to self promote books and products. "Redundant fees" would indicate you're paying for the same benefit/rider/protection twice rather than the truth that you are paying for something not otherwise available. And the limited liquidity lie is also blatant - never sold an annuity that didn't provide the annual 10% and/or RMD distribution or 5-10 year annuitization (or longer) option after year 1-2. Who needs or advises or manages IRAs with a life expectancy any shorter than 5-10 years?????? I always park some portion of rollover to funds for additional liquidity and to protect the 10 year "rollup" living benefits but what a stupid argument, especially from someone who purports to be a financial professional!!!!


Now there are some stinker products out here, no doubt!! But most are limited to EIAs regarding illiquidity and long surrender charges. All top tier products (about 95%+ of those sold by licensed reps/advisors) have plenty of liquidity options and short (5-10 year) surrender cycles. For that, the client pays no upfront loads or sales charges, they make a time commitment and pay for the benefit costs provided by contract.

[Lucullus]

I spoke at some length with Mr. Skloff and he is clearly an intelligent guy whose beliefs about annuities are sincere. But some of those beliefs are simply mistaken. He insisted to me, for example - over and over again - that the purchaser of a deferred annuity pays for tax deferral, that the tax treatment of a deferred annuity is among the benefits for which the purchaser pays contract costs (such as M&E).

His argument was that the person who wants tax deferral has to pay insurance charges because only insurance products offer tax deferral. Well, first of all, that's not correct. Series EE bonds get tax defrerred treatment (if the buyer wishes it). So, for that matter, do common stocks. You buy a stock and hold it for more than a year. And, in that case, you not only get tax deferral but the tax, when you finally pay it, is at Long Term Cap Gains rate.

Moreover, if the tax treatment IN AN ANNUITY is among the benefits the purchaser pays for, then how is it that the purchaser of a variable deferred annuity pays M&E charges and the purchaser of a fixed annuity does not, YET BOTH PURCHASERS GET PRECISELY THE SAME TAX BENEFITS.

Mr. Skloff's misunderstandings are not unusual. I see them a lot in critics who come from the INVESTMENT ANALYSIS community. The reason is very simple (and very frustrating). These folks are so used to applying investment logic and investment mathematics to products and strategies they examine that they do it even when that logic and that mathematics are inappropriate.

A deferred annuity is, to a large exent, an "investment". So, arguably, is a fixed annuity. Yet they are both something else as well. They are both RISK TRANSFER instruments. The primary risk transferred is "superannuation" (outliving one's financial resources). EVERY deferred annuity MUST guarantee annuitization at payout rates no less favorable than the factors appearing in the contract. Yet many critics of annuities dismiss annuitization, not merely as something that isn't all that important, but as something the guarantee of which has NO value. I've had critics insist that, since only 2% of annuities are ever annuitized, annuitization at guaranteed rates is clearly not valuable.

Close, but no cigar. While it is true that the payout factors in deferred annuities are lower than those available in the immedaite annuity marketplace (and while that has been the case, to my knowledge, for at least the thirty seven years I've been in this business), this may not always be the case. IF breakthroughs in medicine result in longer life expectancy, annuity payout rates will eventually reflect this longer life expectancy. I am quite certain that EVENTUALLY the payout rates available in the SPIA marketplace will be higher than the payout rates guaranteed in today's deferred annuities. I simply don't know how long it will be before that happens.

Mr. Skloff insists that only 1% of VAs produce death benefits higher than the account balances, and that LIMRA says so. I do not say that this is false, merely that I would be very interested to see the data. I'll stipulate that, over the long haul, VERY few VAs should produce a death benefit (adjusted for withdrawals) lower than the amount invested.

I'll also stipulate that VERY few term insurance policies are likely to pay a death benefit. (And, according to that same LIMRA, very few - less than 5% - do).

To declare that term insurance is not worth its cost because few insureds die when their policies are in force reflects a fundamental misunderstanding of probability theory and its relationship to insurance. It also reflects a mindset that is firmly rooted in investment thinking. But insurance and investments are very different things.

Investment is about acquiring profit.

Insurance is about avoiding (or minimizing) loss.

Don't get the two confused. And, especially, don't attempt to apply tax-weighted investment thinking to what may be largely (or entirely) a risk transfer problem.

What's the Internal Rate of Return on your -

homeowner's insurance?
auto insurance?
errors and omissions insurance?

MUCH of the benefit of a deferred annuity is "investment return" and can properly be analyzed by investment mathematics. But a sound comparison of two investments doesn't declare one superior to the other solely because the "superior" one has a lower expense ratio (and assuming that both will produce the same results). What if one alternative offers guarantees - having value to the purchaser - that the other alternative does not offer? Is it not reasonable to adjust the comparison to account for that difference?

In The Annuity Advisor, Michael Kitces and I suggest that when comparing a VA offering certain insurance features with a mutual fund offering no such features (where both will be invested in the same asset classes), one way of making the comparison is to ask the client to value the insurance features. (e.g.: If the mutual fund promised to pay your heirs what you invested, or what you invested, compounded at X%, even if market losses had driven your account well below what you paid into it, would you pay 0.75 percent per year of your account for that guarantee? How about half a percent? A quarter of a percent?

When the client has given you her estimate of what SHE would pay for the guarantees the VA offers (but the mutual fund portfolio does not), you simply increase the fund expense ratio by that much (or decrease the VA expense ratio by that much) and run the comparison?

It ain't perfect, but it does help to get clients (and other advisors of those clients) to a point where we're all looking at BOTH the COSTS of an instrument AND the BENEFITS for which those costs are charged.

- John Olsen

[Bradly T.]

John - It really doesn't matter how sincere the ignorant or foolish are, especially when they hold themselves out to be professional advisors. To hate or dismiss what one does not even understand is to display a dangerous capability....on behalf of others who rely on your knowledge and expertise!!!! If Mr. Skloff's clients understood his lack of knowledge and misinformed prejudice, they would not be his clients. Every financial product is one tool among many. To believe any one tool will do all things or is superior to all others, demonstrates narrow minded, self imposed limitations of knowledge about our craft and the possibilities for managing risk and reward in very individual and unique circumstances/needs.


I wake up every day afraid of what I don't know (which is plenty) that may harm a client. Since our universe changes at warp speed, it is a challenge to keep up with what I used to know, let alone to learn what I never knew before. It just seems to me that the most arrogant and opinionated of us still have the most to learn....humility, not the least. While it may be perfectly ok to offer limited service and product options (tools), it is also important to know the limits of those tools and the value of those products and services (tools) that you do NOT offer. Mr. Skloff has way too much alphabet soup behind his name to be so ignorant....and opinionated.

[cassarooni]

Please rename this article "Should VARIABLE ANNUITIES Be Used in Retirement?" since fixed annuities are a completely different animal and it is discussions like this that steer folks for whom a guaranteed interest rate fixed annuity would be idea. Shame on you for not differentiating the two.

[cassarooni]

...and thank you John Olsen for your reminder that investments and insurance are not the same. I appreciate your comment about IRR on other types of insurance. Well said.

[Bradly T.]

cassarooni - while I agree there are significant differences in the two, the argument made by the so called retirement plan specialist does include fixed annuities too. Indeed, I doubt he knows there are no M&E fees on FAs or how there interest is credited. His position is that any account with a tax advantage which is lost in a qualified plan should not be used in such a plan. Silly, I know. And like you, I really appreciate John's patient and comprehensive presentation of the fallacies and facts within the issue. So, one can only assume that Skloff believes that only simple interest accounts and ordinary income dividend funds and frequently traded equities with short gains and REITs should be included in qualified plans...since most everything else loses its tax advantage in tax deferred plans.

Frankly, an argument could be made for this position IF a client has sufficient nonqualified investments so that all ordinary income taxed positions could be held in-plan while all tax advantaged investments could be held out-of-plan. However, most of my clients have most of their investable assets in-plan so if I am to diversify the portfolio adequately, I have to employ full spectrum within the plan.

A more interesting debate might be equity positions taken within a nonq. VA. Deferring cap gains taxes into eventual ordinary income taxes.....there'll be some lawsuits on that I am sure. There have already been lawsuits lost over deferring a parent's low income tax (relative to heirs) to an IRD tax for beneficiaries in a higher tax bracket. Now there's a couple of issues with legs....and merit. By the way, this issue is the reason many VAs (nonq.) offer the 40% "kick" rider - to pay the IRD tax for high bracket heirs; by removing the IRD issue, all such litigation ceased...just a word to the wise.

[Lucullus]

Bradley,

You write -

A more interesting debate might be equity positions taken within a nonq. VA. Deferring cap gains taxes into eventual ordinary income taxes.....there'll be some lawsuits on that I am sure. There have already been lawsuits lost over deferring a parent's low income tax (relative to heirs) to an IRD tax for beneficiaries in a higher tax bracket. Now there's a couple of issues with legs....and merit. By the way, this issue is the reason many VAs (nonq.) offer the 40% "kick" rider - to pay the IRD tax for high bracket heirs; by removing the IRD issue, all such litigation ceased...just a word to the wise.

Amen, brother! I have been saying, for years now, that the advantage of tax-deferral that a variable deferred annuity enjoys is generally not worth the disadvantage of "all ordinary income" treatment, even if the early distribution penalty of IRC 72(q) isn't a factor. I've done hundreds of analyses and the envelope within which a VA outperforms a NQ mutual fund portfolio is very narrow. You've got to have a VA with a VERY low M&E (far lower than the average) AND a mutual fund portfolio with a high expense ratio AND a high turnover rate AND you've got to have a distribution period of a couple of decades or more.

The one factor that seems, to me, to exert the most influence on whether the VA can outperform the funds portfolio is ....M&E charges.

All that is assuming that future gross investment returns of the VA subaccounts and the mutual fund portfolio are identical.

It also assumes today's tax rates. IF the difference between Long Term Cap Gains and Ordinary Income rates narrows in the future, the VA will fare better in more situations.

If one adds "guaranteed living benefit" riders to the analysis, the paradigm changes. The rider provides a level of INSURANCE that does not exist in the funds portfolio (although some funds groups are reportedly looking at providing "synthetic annuity" riders to their offerings, which would function like GMWBs/GLWBs). Perhaps most importantly, the availability of a GLWB can allow an investor whose risk tolerance doesn't allow much equity exposure to allocate funds more "aggressively" (because the rider ensures a minimum return AND duration of income).

If the cost of the insurance features in that VA (chiefly, the GLWB rider, but also the M&E [because you can't get the first without the second]) are less than the projected "risk premium" of the "more aggressive" allocation to the VA + GLWB, as compared to the mutual fund portfolio, then the additional "cost" of the VA produces disproportionately greater utility.

If the deferred annuity being analyzed is not variable, but "fixed" (in which category, I include "index annuities" [because they are fixed annuities]), we have a totally different analysis. The "all Ordinary Income" treatment of the annuity is no longer a disadvantage, because the investment instruments properly comparable in risk/reward to the fixed annuity also get Ordinary Income treatment. Plus, there's no M&E. So the advantage of tax deferral in that analysis is generally higher, although the 72(q) penalty may reduce that advantage.

So, what's all that mean, in terms of whether a deferred annuity is "better" or "worse" than the alternative you're looking at? Just this:

It depends. On several factors, not the least of which is the investor's goals and risk tolerance. Your Results May Vary. One Size Does NOT Fit All.

- John Olsen

[Bradly T.]

John O. - Very good points. I wonder if your analysis comparison applied a management/wrap fee to the funds portfolio? Most RIA portfolios apply a fee equal to the average M&E (1.25%) and most VA subaccounts are "discounted" on their management fee, indeed, more and more ETFs and index options are showing up as VA options. I would think the cost related differences would be minimal??? And in a nonq. VA, what's the trading cost savings for DCA and rebalancing and the tax savings for rebalancing compared to funds? Would you favor a return to FIFO or proportional taxation for nonq. annuity distributions/withdrawls??


I only started using the living benefit riders a couple of years ago (historically I have used for death benefits and mechanical features...fixed account, DCA, rebalance, etc.) and have a concern about their cost. While the cost of future value for lifetime income riders may be reasonable, I wonder how many contracts will live through the guaranteed benefit period paid for with increased premiums? Not due to policy failure but because retail money moves so frequently. Clients must leave money in these contracts a long time to benefit from the living riders....much longer than they often do. The annuity providers endlessly roll out "new and better" contract features to entice old contract replacements with new. This does not make the M&E "wasted" but it does make the future value riders premiums a wasted cost.



I read an interesting letter from Jackson National VP this week in one of our trade rags where he blasted the newer "simplified" VAs for reducing client/advisor customization options. His claim is that the cheaper the contract, the less value available and a large ala carte menu of optional features was important to professional advisors. I have to agree based on the current "stripped and cheap" options available so far. Enjoy your analysis and commentary.

[Community Manager]

This is an incredible discussion! We did a story today (see the link below - my apologies for the oversized headline) that is relatively related. As one analyst told us "the devil is in the details" and a lot is is still up in the air, but this was pretty intriguing.

Obama Proposals May Boost Annity Sales: http://www.onwallstreet.com/news/Obama-Effron-Weatherford-2665571-1.html

[Lucullus]

I could not read the link in Community Manager's last post (it was white text on a nearly white background). In additon, when I copied same to the clipboard and pasted it into a new browser tab, the browser couldn't find it.

Community Managers: Have you folks considered talking to the tech people who manage this forum and ask them why the software does weird things to the text in some posts?

John Olsen

[acketyack2]

this is a good question - I am going to get to the bottom of this - my apologies ...


hopefully this link is easier to read: [url=http://www.onwallstreet.com/news/Obama-Effron-Weatherford-2665571-1.html]





http://www.onwallstreet.com/news/Obama- ... 571-1.html[/url]

[Forum Administrator]

I could not read the link in Community Manager's last post (it was white text on a nearly white background). In additon, when I copied same to the clipboard and pasted it into a new browser tab, the browser couldn't find it.

Community Managers: Have you folks considered talking to the tech people who manage this forum and ask them why the software does weird things to the text in some posts?

John Olsen

We are continuously striving to improve the user experience of our site. We have logged the bug about the white URL text, and will have it fixed shortly. Additionally, we in the process of upgrading our forum software to improve the user experience, and hope to have that rolled out in the next few weeks.

If anyone has any comments or concerns about the usability of the forums, or to report and quirks, please email: DiscussionWatch@sourcemedia.com

[Bradly T.]

John - just wanted to acknowledge one of your profundities....."IT DEPENDS!" I've had the pleasure to train many new advisors over the decades and one of the first lessons is.....there is only one answer to every client question that is always correct...."It depends...." followed by a series of advisor questions. While we all want to look like knowledgable experts, we are often too quick to provide a simple answer. Our job is to provide options and empower client decision making which requires a lot more information than ever found in a client's question. Have you ever noticed how hard it is to get a straight answer from a doctor or lawyer?? There's a good reason for that. Guess that's why I get so annoyed at those professionals who offer limited solutions to complicated situations and criticize tools they neither use nor understand. Surprised we have haven't heard back from the so called retirement plan specialist who doesn't know anything about the original pre-IRA,401K,403,457 retirement plan - annuities. I'm still wondering if he uses equity funds in his plans???? Surely that would be too hypocritical...? After all, you are "paying for" a tax advantage you are not receiving!!

[Bradly T.]

Just wanted to move this topic back up to the top of "Most Recent". We seem to have lost our misguided and misinformed retirement plan specialist who believes that no investment with any tax preference should be used in an IRA or qualified plan. Or perhaps he simply realized the illogic of his original premise when it was more narrowly applied to annuities.


Thought Jann might want to join this thread as he/she seems to have same perspective. Or is this whole question a paper tiger for annuity haters?? Come on you annuity haters, dig in and fire back.....we're all friends and fellow professionals here (I'm sure even Ron Mexico has friends....haha).

[B Smith]

An anti-annuity article in IN? John, it is the #1 source for biased articles towards advisors selling VAs and other gimmicky products, treating us like we just don't understand why we shouldn't. It's one article for the other side. We know they only report on extremes, but hey, at least it gives a different opinion for once. Let it go.

[Lucullus]

"John, it is the #1 source for biased articles [i]towards advisors selling VAs and other gimmicky products, treating us like we just don't understand why we shouldn't."[/i]

Really? I've been a reader of Investment News for years and that's not my impression of it (or of its usual content). Of course, B. Smith and I may read the same article and have two very different views as to its content - or bias.

I wonder how many others here feel that IN is generally "biased toward advisors selling VAs and other gimmicky products".

Anyone else care to chime in on this issue?

[debaser]

"John, it is the #1 source for biased articles [i]towards advisors selling VAs and other gimmicky products, treating us like we just don't understand why we shouldn't."[/i]

Really? I've been a reader of Investment News for years and that's not my impression of it (or of its usual content). Of course, B. Smith and I may read the same article and have two very different views as to its content - or bias.

I wonder how many others here feel that IN is generally "biased toward advisors selling VAs and other gimmicky products".

Anyone else care to chime in on this issue?

I would say IN is a publication that tends to be anti-annuity but isn't dogmatic about it.

[Tad Borek]

I wonder how many others here feel that IN is generally "biased toward advisors selling VAs and other gimmicky products".

Anyone else care to chime in on this issue?

As I posted above a lot of IN pieces read like regurgitated press releases, and yes often for gimmicky products (all types). There's a standard pattern of "Advisors Increasingly Turn to [fill in product here]." Backed up by a survey from an unknown or industry marketing group showing 64.6% of the handful of advisors surveyed said they might consider it for some of their clients, maybe.

Don't get me wrong I like IN, I've read it for years and pick up useful things from it. But it's a 10 minute read at most once you skip past all that kind of stuff. I used to work for a trade magazine years ago and it's just the reality of this kind of publication.

The short article that started this thread looks like PR around a class action, or maybe someone at IN has a feed from a clipping service that watches securities-related filings. But it's just restating the complaint - any letters of indignation might as well be directed to the plaintiff's attorney.

-Tad

[Lucullus]

Tad,

GREAT observations, sir!

John

[palisadeshudson]

I don’t think so – at least not for most people, and not right now. On this point (and quite a few others), I find myself disagreeing with the Obama administration.

Assistant Labor Secretary Phyllis C. Borzi told Bloomberg that there is “a tremendous amount of interest in the White House” in annuities and other options that could be included in 401(k) and other retirement plans to provide a guaranteed income source.

But this interest may be misplaced. Almost any retiree can use 401(k) money to purchase an annuity, even though most company retirement plans do not offer that option. The simple workaround is to roll the 401(k) money into an IRA, which can be used to purchase the annuity. Though this is fairly easy to do, not many people do it. There are good reasons why they don’t.

The biggest problem most people have in financing their retirements is not that they live too long; it is that they save too little to support the kind of retirement lifestyles they want to have. A too-small nest egg means a too small annuity payment. So most people keep their retirement money accessible, invading it more readily when they are relatively young retirees. They are then forced to adjust their spending downward as their money dwindles, but often this occurs as the retirees reach more advanced ages and become less active. Those depleted savings may mean an uncomfortable old age, but that is what can happen when people fail to save enough.

The problem is even more acute in the low-interest-rate environment we have had in recent years. Low interest rates mean lower annuity payouts, because insurance companies calculate the payments in large part based on what they can earn by conservatively investing the buyer’s initial premium.

Then there is the inflation risk. A fixed payment for many years, which is what most lifetime annuities promise, may not buy very much if we have high or even moderate inflation for a long period of time. Retirement funds that are invested in stocks or other growth-oriented assets provide an important hedge against inflation.

There also is a life expectancy gamble in purchasing an annuity. If you live a very long time, you benefit by holding an annuity that keeps paying and paying. But if you buy an annuity and then die prematurely, your heirs generally are not able to recoup the excess money you paid. There are annuities that provide a refund in cases of early death, but those contracts carry an even-smaller payout to enable the insurer to bear the cost of serving some very long-lived beneficiaries.

Finally, there is a small element of credit risk when you buy an annuity. An annuity is a promise that is no stronger than the company that makes it and the state-run insurance pools that typically back those companies. AIG, a major annuity provider, needed $180 billion in federal bailout money after the 2008 financial crisis. Would all annuity holders have been protected if AIG had been allowed to collapse as Lehman Brothers did? We will never know. But ask yourself whether you want to have most of your retirement funds tied up in another company that someday puts that question to the test.

I addressed this issue on my blog. You can see the full post here.


-----
On behalf of:

Larry M. Elkin, CPA, CFP®
Founder and President of Palisades Hudson Financial Group LLC
Company Website: http://www.palisadeshudson.com/
Blog: http://www.palisadeshudson.com/current-commentary/

[Bradly T.]

While your points are valid they are also incomplete. There is NO reason now, or ever, to NOT consider annuities for a portion of IRAs. Not political reasons, tax reasons, or interest cycle reasons. Income annuities can be used later in life or laddered over shorter time periods to address both the interest cycle and inflation effect issues you bring up. There is no single account that is suitable for ALL of ANYBODY's money....so the arguement that annuities are not suitable for all of someone's money is true enough but not a reasonable arguement against their use. Many of the shortcomings you list for income and fixed annuities can be addressed with VA living/income benefits without annuitization or fixed interest limitations.

[B Smith]

While your points are valid they are also incomplete. There is NO reason now, or ever, to NOT consider annuities for a portion of IRAs. Not political reasons, tax reasons, or interest cycle reasons. Income annuities can be used later in life or laddered over shorter time periods to address both the interest cycle and inflation effect issues you bring up. There is no single account that is suitable for ALL of ANYBODY's money....so the arguement that annuities are not suitable for all of someone's money is true enough but not a reasonable arguement against their use. Many of the shortcomings you list for income and fixed annuities can be addressed with VA living/income benefits without annuitization or fixed interest limitations.

I agree with most of the above, however VAs with living benefits belong no where.

They pay half of what regular annuities do.

Their 'guaranteed growth' guarantees less income than investing in Treasuries and TIPS.

They're garbage.

Invest the entire IRA into laddered Treasuries and TIPS and you will have more income, faster growth of 'income', and wealth to pass on. VAs are legal fee bailout buckets. Not only that, but the fees weren't enough to make many companies go to TARP. They RISKED your retirement, and couldn't make enough on 5-6% to cover that risk even knowing they only have to start by giving you your own money back, and at a 50% lesser rate then they would their money in a normal annuity.

[Bradly T.]

B Smith - I only know of 4 insurance companies that took TARP (and I don't use any of their product - VA, fixed, or income or funds for that matter) and none of the 4 actually needed TARP after 3 months of market recovery. Indeed, it was their legally required capitalization requirements which immediately exposed their balance sheet shortfalls to meet future obligations which should bring more confidence to annuity owners than to banks, etc., which collapsed before anyone knew their situation. But the ability to meet future obligations is a valid point of yours and Elkins...due diligence of the guaranteeor is an essential step whether for LTC, life, DI, P&C, or annuity issues.


I would argue with your criticism of VAs generally but I only use top shelf product from blue chips so my defense should not be considered a blanket endorsement of all VAs from all companies. And while I am no fan of individual, laddered bonds (of any kind) and believe that TIPS, while a good idea in general, may greatly disappoint in low inflationary cycles (such as prolonged recessionary and slow growth or even deflationary cycles - expected in Gross's "new normal" for the next decade or longer) - I certainly concede that this is both a reasonable and traditional retirement portfolio methodology. The guaranteed income riders I employ pay 5.5 -7 % of current or future income base (a guaranteed value and event unless market value is higher and then the base is elevated too) depending on client age at first withdrawl. The client is fully invested in highly rated market subaccounts from dozens of fund families including long stock and fixed income, indexes, alternatives, and select market segments which provide a market delivered total portfolio value opportunity that can equal or exceed the guarantees provided in the contract.



While it is true that the insurance companies do charge a premium for this risk transfer, many studies have shown that non-insurance risk transfer solutions are actually more expensive than the premiums charged for the insurance solution. Some even suggest that premiums are too low and guarantees too high - although, as stated, the companies I use have very sophisticated actuaries and risk hedging strategies and long histories of making obligations per their contracts. There are many critics of annuities in general and VAs in particular and I understand your aversion; it's not my place to convince you to employ them on behalf of your clients, however, I will criticize anybody's blanket statement that "they're all garbage" regardless of the financial product being described. I would venture to say there's a place for almost every financial product available and there's certainly a place for market risk-transfer and guaranteed lifetime income solutions for retirees.



I respectfully disagree with your blanket characterizations and Elkin's criticism of annuities as a viable solution alternative to retirement distribution needs. But hey, that's just my opinion.

[northwoodsjoe]

I am going to add my 2 cents because I am finding myself more passionate about these products. I feel that VA's have their place. If used in moderation, they have obvious benefits. The "benefits" are key in this discussion.
In my opinion, the "Living Benefits" (GMIB, GMWB, etc.) can have a place in qualified plans. Having said that.............I would only use VA’s with living benefits. There are many plans that I run into that have nothing more than a death benefit and are charging 1% – 1.25% M&E. This doesn’t add up. VA’s without living benefits are useless.




The means that the living benefits can really become costly. (If you add in the standard M&E with Living benefit rider). Full disclosure is required and the clients need to fully understand the contract. Most importantly, how the Living Benefit really works and what their “walk-way” money is if the surrender prior to CDSC, or after. That is where many of these contracts are “misrepresented”. You have to do the math for them and run through abnormal and normal redemption situations.

[Bradly T.]

Joe - Nice to hear from a convert!! Let me disagree with your cost and DB points - the cost of a VA without living benefits is nearly identical to a managed account - fund/subaccount management fee plus either M&E or the management fee of advisor. But there is a DB beneficiary outcome guarantee with VA - I've deliverd over $1mm in DBs over the past 10 years. This provides volatility and correction (or market collapse) protection and peace of mind to every client to invest in market portfolios - at a reasonable premium, not available in brokerage, managed, or directly held funds. My math tells me that almost all investment options cost the same for 5-7 years (A, B, C shares, load waived managed, and VA). After 5-7, the VA and managed are the most expensive and priced similarly. I have been using living benefits for only 3 years (of past 22) but, as you suggest, the research is compelling for non-annuitized guaranteed current or future income solution planning. And, as you suggest, as a proportionate (not total) portfolio solution.

[northwoodsjoe]

Bradly,

I'm not sure which funds you are using inside your VA's. Doesn't really matter..........they have expense ratios. Chances are they are close to the same share class (expense ratio) you will find outside the VA. Having said that, the M&E is paying for the DB guarantee (without the living benefits)......................I simply don't believe that is the most efficient use of the clients money. Especially if you are active in managing/montoring/reviewing the clients funds.(wrap or not). Investment options are limit-less which allows for ultimate flexibility with a non-VA account.



You have paid out a million in DB?? Is that DB from the "guarantee"(DB - Contract Value = Guarantee) ....or overall DB. There is still going to be assets transfer outside thje VA. What is the "true" benefit for cost in your 1MM.



I can buy a lot of life insurance with 1% (for most people).



Nice discussion.

[Bradly T.]

Yes, that's insurance benefits over mkt. value. Generally, subaccounts are significantly cheaper on mngmt. fee than funds - both index and active. For M&E (remember there's mortality - M - and expenses - E), those costs include DCA, rebalancing (tax free), a fixed principal and interest account, and funds selection and due diligence committees in addition to the risk transfer premium. There is very little difference in client cost between any options available for 5-7 years for no growth, no loss, no distribution calculations (all three of those possibilities DO affect relative cost but are not predictable; for example, strong growth makes A shares cheaper than any option but mkt. losses makes A shares relatively more expensive than others). Today's blue chip offering have incredible investment options including hedge, institutional, alternative, deriviatives, mkt. segment, etc. and allow advisor to trade daily (some subaccts do apply limits) and execute disciplines at will. That said, I reiterate, VAs should be "pockets" of a portfolio designed for specific strategic outcomes and risks.....they and nothing else is suitable for all of anyone's money. I consider them the swiss army knife or radial arm saw of the portfolio (lots of options and uses) but you can't build a house with just a radial arm saw and I always take more than the army knife on a campout. No perfect and complete options are or ever will be available.

[B Smith]

Yes, that's insurance benefits over mkt. value. Generally, subaccounts are significantly cheaper on mngmt. fee than funds - both index and active. For M&E (remember there's mortality - M - and expenses - E), those costs include DCA, rebalancing (tax free), a fixed principal and interest account, and funds selection and due diligence committees in addition to the risk transfer premium. There is very little difference in client cost between any options available for 5-7 years for no growth, no loss, no distribution calculations (all three of those possibilities DO affect relative cost but are not predictable; for example, strong growth makes A shares cheaper than any option but mkt. losses makes A shares relatively more expensive than others). Today's blue chip offering have incredible investment options including hedge, institutional, alternative, deriviatives, mkt. segment, etc. and allow advisor to trade daily (some subaccts do apply limits) and execute disciplines at will. That said, I reiterate, VAs should be "pockets" of a portfolio designed for specific strategic outcomes and risks.....they and nothing else is suitable for all of anyone's money. I consider them the swiss army knife or radial arm saw of the portfolio (lots of options and uses) but you can't build a house with just a radial arm saw and I always take more than the army knife on a campout. No perfect and complete options are or ever will be available.

Bradly, I respect your opinions and realize we're both spouting off numbers based on our experiences rather than providing facts. My measurement of past annuities disagrees with a lot of what you are saying about subaccounts and the amount of income you are discussing. That said, it is near impossible to get information on these. My gut says there is no way that a VA pays out the amounts you state on both a cash value or a benefit without charging an insane amount; same with the statement above about subaccounts. However I'm willing to look at the options. What are a few annuities I should look at? Do you prefer longer or no surrender charges? I would guess longer charges make the above more likely.

Most recently I have looked at low-cost options since they seem to provide more accessible information, however, in the past I looked at some of the more popularly sold choices and didn't believe I found the above were accessible.

[Bradly T.]

B Smith - Agree, stripped down low cost VAs offer few benefits (thus their low cost) other than tax code delivered deferral (not a contract benefit, a tax code benefit). I use Nationwide, Pru, Met, and Jackson National (there are more top shelf blue chips but I can only keep up with so much). M&E of 1-1.5% is same as any RIA managed account fees (or less) and investment options are VERY extensive including institutional and hedging and futures, etc. (if you're into that style). Subaccounts are many and highly rated and all have fund "sisters" (clones) - one can easily compare the fund managemnt fees compared to the cloned subaccount fees - Franklin, American, Templeton, Fidelity, T Rowe, Am. Century, Black Rock, Ivy, RYDEX, Janus, Dreyfus, NeubergerB., Oppenheimer, PIMCO - them and plenty more offer identical fund/subaccounts. Hancock offers wide selection or rebalanced lifestyle funds of funds (10+ families) with only 5 BP additional mngmt fee (not including M&E or rider charges). There is ALWAYS a reasonable arguement for AND against risk transfer premiums but M&E is NOT all insurance premium, there are "management" and execution costs included.


I never use over a 7 year. 0 and 4 yr options available but cost more to client. Don't care what I'm doing, I better have a 7 year committment. All offer 10% liquidity withdrawls annually, no surrender charge to beneficiaries, and waived for various reasons. Usually limit to 25-35% of total portfolio and use future income riders for long term, future benefit holding. These things don't cure cancer or make markets go up you know.

[Beppe]

Retirement by its very definition dictates a time of seclusion, relaxation. How can anyone enjoy these qualities of life if they don't come with guarantees. Fixed annuities offer principal guarantees, lifetime income guarantees and guaranteed liquidity. The stock market, et al, guarantees only emotional and financial turmoil and frustration. The old days are gone forever and snake oil salesmen still push promises based on past performances. It's a new world and we ain't the big guys on the block anymore. Anyone over 60, provided they're not fatcat wallstreet boys or millionaires, should not be exposed to risk; there is no reward for enduring risk only doom.

[B Smith]

Retirement by its very definition dictates a time of seclusion, relaxation. How can anyone enjoy these qualities of life if they don't come with guarantees. Fixed annuities offer principal guarantees, lifetime income guarantees and guaranteed liquidity. The stock market, et al, guarantees only emotional and financial turmoil and frustration. The old days are gone forever and snake oil salesmen still push promises based on past performances. It's a new world and we ain't the big guys on the block anymore. Anyone over 60, provided they're not fatcat wallstreet boys or millionaires, should not be exposed to risk; there is no reward for enduring risk only doom.

You clearly do not understand risk. Risk is not = the stock market. It's always a 'new world'. Except similar patterns like inflation / deflation, etc occur. Let's talk to those that retired in the 70s about how they felt about their pensions buying 1/2 the goods they could within a decade of retirement. The biggest risk was to put everything in fixed annuities.

And you separate 'fatcat wallstreet' from the same insurance companies that needed to be bailed out? That risked their contract holders money? Wow.

Review investments 050 for the benefits of diversification, and econ 050 for the ways a market system operates.

[Bradly T.]

Must agree, in principle, with both views. Some risks should be diminished during retirement per Beppe's post - but risk comes in many forms and cannot be eliminated by any strategy or product. While Beppe's views related to fixed annuities are sound enough, the "income" solution most offer is an annuitization solution....now, an inferior option relative to VAs guaranteed income while maintaining market and surrender values and lump sum death benefit features. I use FAs (or did until interest rate offerings got so low) and I use "split" strategy (5-10 year IA with FA to replace with income increase - a laddered solution to interest rate and inflation and mortality risks). It is important to create strategies which DO provide some peace of mind and mechanical longevity and success probability for retirees - but to abandon beta and market participation for some reasonable portion of client assets will and does increase other risks.

Risk does not guarantee reward but the lack of risk does diminish the opportunity for reward. This exposes the "art" needed within the science of planning - finding the balance between risk transfer and retention over an unknowable time frame and for those with unknowable future circumstances and responses to an ever changing political, medical, tax, and market landscape. It's almost a little nutty to try....it's insane to promise outcomes.

[David F. Sterling, Esq.]

Great analytics and point of sale due diligence on contract features and attributes. There is also no aruging with the distinction drawn between investments and insurance. And, as a starting point, what could prove more insightful and productive than, "it depends." However, I would welcome a response to what I consider to be a crucial element of the "risk management" attributes of annuities; the "execution risk" element.


To read this forum one would think that all of those contractual entitlements imbedded in the annuity somehow appear magically to rescue the owner from certain financial collapse. Annuities do not operate on automatic pilot. Yet, to read the marketing material and listen to the sales presentations one would think exactly that. Annuities are complex legal contracts with an array of contingency and default provisions that require active monitoring and technical skill. For those enamoured with the death benefits and their application to retirement plan usage, I ask this question.



Should a qualified annuity contract provide the same settlement options that a retirement plan participant would be entitled to under the IRC? There just might be the need for a deeper layer of due diligence and disclosure here.

[fundinvestguru]

Please excuse me if I put on my consumer oriented hat and my investment advisor face. What I criticize I try to fix as well and I have been managing consumer assets for some time now.



As former Texas Governor Ann Richards said when she was addressing the National Association of Insurance Commissioners annual conference, "You better stop reading the fine print and start reading the handwriting on the wall!" She's still right.

Variable annuity critics should be pointing out that:
1. Investing in a carefully diversified asset allocation plan that results in losing money in several markets rather than one has little value.

From 10/31/07 to 12/31/08 variable annuity industry assets shrank from $1.5 to $1.0 trillion dollars as few financial advisors and no sub-account managers acted to reallocate assets even to money market safety.

Sub-account management fees are for managing the managers risks of exposure to his clients complaints (read a prospectus); third-party investment advisor fees add value only if they result in risk-lowering and/or yield-improving reallocations.

2. Paying additional fees for investment restrictions, illiquidity and watered down style-box choices is probably unwise.

Making traditional one-way investments in a two-way market is asking for trouble, being restricted from or recommended not to protect from a down market your own assets is tragic.

3. Tax-deferring losses are not a tax-planning benefits; tax-deferring gains may be if the later taxes are likely to be higher.

I know of no investor who asked his advisors to tax-defer his losses.

4. A twenty-year guaranteed-minimum-return is of little value from a ten-year insurance company with a portfolio full of illiquid hard-to-value collateralized mortgage obligations even if your state insurance commissioner allows you to carry them at cost to meet your required reserves.

A prudent financial advisor takes downgrades of credit ratings on the insurers he recommends seriously, does not recommend investment in portfolios unable to and without a track record of taking defensive action in chronic down markets, and recommends a proactive manager with a strong long-term track record to watch over his clients’ assets with the charge of producing regular positive returns over the long-term and finally has a Plan B for clients if portfolio risks or insurer risks exceed what is in the best interests of his or her client.
That strategy should keep you and your firm out of the courts and reduce client turnover.

[Capitalism Rules]

I have struggled with VA for a lot of years. I have stayed with keepiong VAs out of my qualified accounts until the last few years. This stock market the last ten years has me rethinking my positions. I put a client in the Am Skandia VA (now Prudential)product with a guartanteed return of principal rider. This client has averaged 6.25% since 2003. The main reason is the money is moved in and out of the market with a timing formula. By the time the market bottomed in 3/2009, all his money was in a fixed account. Having their principal guaranteed is also a good way to keep clients from bailing on market dips. The expenses of this VA are higher than a straight mutual fund but the net returns are also higher. Too many financial writers today get hung up on expenses. Looking at IRR on these funds it higher than my non VA accounts and it has less risk. That's a winner for me and my clients. In March and April of 2009 I put a large number of my clients in this product as they were interested in jumping out of the market at that time. I was able to keep them invested while guaranteeing their remaining principal. They are pretty happy today they didn't jump out. Today's VAs with living benefits are a different animal than the old products. Principla guarnatees and income riders do indeed have value as the latest market performance has taught us. Ignore them at your own risk.

[fundinvestguru]

That sounds like you found a great deal. It only takes 7.2% to double your money in just ten years and few investments of any kind were able to do that with zero down years; you found one of them.


The next issue you need to face is to take a very close look at Prudential/American Skandia's credit ratings for any indication that they may not be able to keep their promises. If you have a problem, you may well be beyond the period during which you mgiht be charged a surrender charge.



The issue to consider is especially important if this is as it appears to be a general obligation of the insurance company at which you will be listed wtih the other general creditors in a "rehabilitation."



But you're on the right track. If you can get a return which approaches 7.2% you are in the ballpark.



Good work.

[B Smith]

That sounds like you found a great deal. It only takes 7.2% to double your money in just ten years and few investments of any kind were able to do that with zero down years; you found one of them.


The next issue you need to face is to take a very close look at Prudential/American Skandia's credit ratings for any indication that they may not be able to keep their promises. If you have a problem, you may well be beyond the period during which you mgiht be charged a surrender charge.



The issue to consider is especially important if this is as it appears to be a general obligation of the insurance company at which you will be listed wtih the other general creditors in a "rehabilitation."



But you're on the right track. If you can get a return which approaches 7.2% you are in the ballpark.



Good work.

I don't get it... you rail against buy and hold, and congratulate this? A 40% diverse portfolio since 2003 would have earned ~8%, add 20% stocks you'd have ~9%. Non-market timing, non-annuity. Source: DFA balanced strategies. Can't wait to hear the explanation.

Also, if this will be used for a GWMB or annuitized, the important question is not rate of hypothetical growth, BUT what the amount of income that will be received will be. By some calculations I've found the GWMB to be 30-60% less, so you may as well have dropped 50% of your portfolio to buy the same amount of income.

[fundinvestguru]

The acid test is the past decade 3/31/00, the top of the market, to 3/31/10, the last available data (or close to). A balance portfolio in bonds would have done better but how often can bond interest rates fall in the future. The problem with stock index funds was that the bear markets were nearer the beginning of the period and you had less principal to work with when the market comes back. Remember when you lose 33% you have to make 50% just to break even.

Over the next decade, bonds are unlikely to generate positive total returns. Interest rates have been falling for most of the past 28 years and from very high interest rates. Buy and hold bond funds sticking to their style-boxes and no willing to short or go to cash will be hard pressed to produce the returns they did over the past decade.

I don't see a strong recovery any time soon, nor do I see a quick rally in the European markets (although emerging markets are doing well lately even when swimming upstream against a rising dollar), and only absolute return funds striving for a positive return every year seem to have the right idea.

Of course, you can't predict the future and do short-term "market-timing" but you may have some success with reacting to the market and taking defensive actions. Avoiding risk should continue to be the order of the day. Style-box funds that won't take any defensive action are unlikely to generate steady positive returns.

The one potential that troubles me is the potential damage to the Southeast economy of the BP Oil Spill turning the Gulf of Mexico into the Dead Sea and starting a migration to the West Coast to find clean water and work. I'm not sure that California can handle that. It's troubling but nothing to bet on today.

[B Smith]

The acid test is the past decade 3/31/00, the top of the market, to 3/31/10, the last available data (or close to). A balance portfolio in bonds would have done better but how often can bond interest rates fall in the future. The problem with stock index funds was that the bear markets were nearer the beginning of the period and you had less principal to work with when the market comes back. Remember when you lose 33% you have to make 50% just to break even.

Over the next decade, bonds are unlikely to generate positive total returns. Interest rates have been falling for most of the past 28 years and from very high interest rates. Buy and hold bond funds sticking to their style-boxes and no willing to short or go to cash will be hard pressed to produce the returns they did over the past decade.

I don't see a strong recovery any time soon, nor do I see a quick rally in the European markets (although emerging markets are doing well lately even when swimming upstream against a rising dollar), and only absolute return funds striving for a positive return every year seem to have the right idea.

Of course, you can't predict the future and do short-term "market-timing" but you may have some success with reacting to the market and taking defensive actions. Avoiding risk should continue to be the order of the day. Style-box funds that won't take any defensive action are unlikely to generate steady positive returns.

The one potential that troubles me is the potential damage to the Southeast economy of the BP Oil Spill turning the Gulf of Mexico into the Dead Sea and starting a migration to the West Coast to find clean water and work. I'm not sure that California can handle that. It's troubling but nothing to bet on today.

Again, an inconsistency. Your VA moves a client to a high-fee bond fund. Congratulations?