When reading Ric Edelman’s article in Financial Advisor, “7 Reasons I’m Not Fond of Annuities” (Dec. 1, 2015), I couldn’t help but to agree with many of his points. It’s true: annuities can cause issues for investors when the benefits and costs are not aligned with investors’ risk profiles and investment objectives.
According to the Financial Industry Regulatory Authority (Finra), variable annuities are consistently a top source of consumer complaints. Annuities, as a family of products, are often—rightly—criticized in the news and among RIAs and fee-based advisors for being expensive, overly-complex, illiquid and poorly-designed for clients’ best interests.
It’s because of this laundry list of negative attributes that we at Jefferson National entered the annuity space 10 years ago with a goal to reengineer the variable annuity and bring it back to its original intention—helping investors secure their retirement through the power of tax-deferral. When we developed the industry’s first flat-fee Investment-Only Variable Annuity (IOVA), we centered on the simple premise that a low-cost, flat-fee investment vehicle, with a wide range of fund options, in a tax-deferred wrapper would benefit advisors and the end consumer. The marketplace has picked up on the benefits that IOVAs can provide: In stark contrast to traditional annuities, IOVAs are a bright spot in the VA market, enjoying strong sales even as overall VA sales have weakened.
Over the past 10 years, we’ve worked hard to create a solution that combats each of the issues that Mr. Edelman states—a solution that can bring true value to RIAs and fee-based advisors by improving their practice and better serving their clients. That’s why I’ve outlined 7 Reasons Specific IOVAs Can Work When Traditional VAs Don't.
1. Simple, Low-Cost, And Tax-Deferred Solution
As annuities have evolved, so have their price tags. Whether through sales costs, high asset-based insurance fees, rider-based guarantees or surrender charges, the cost of variable annuities often outstrips the benefits of tax deferral. With an average M&E of 135 bps before any additional rider fees, the cost of traditional VAs most often outpaces the benefit that tax deferral can add to an account. In contrast, Jefferson National’s IOVA Monument Advisor charges a flat fee of $20 per month—put differently, that’s just 24 bps per year on a $100,000 contract. Whether you invest $100,000 or $1,000,000, the cost remains the same—which means that, as your assets grow in your account, your fees do not. Less money going into the hands of an insurance company means more money for your retirement.
2. Taking Inflation Into Account
Investors should always take into account the impact of inflation—whether purchasing an annuity or simply saving for the future. With our low-cost IOVA, you’re able to increase returns by an additional 100-200 bps each year, based on reduced fees and the power of tax-deferral alone—which will lead to a bigger base amount when it comes time to withdraw for retirement.
3. Complex And Costly Guarantees
The price of guarantees and riders may seem like a worthwhile investment at first. But protecting against the number of “what-ifs” in life takes a toll on investors’ wallets. In fact, guarantees are often unnecessary when their cost negates their benefit. In the whitepaper authored by Wade Pfau, Ph.D., CFA, entitled “A New Approach to Retirement Income: Next-Gen vs. Traditional VAs", we learn that there will be less need for guarantees. For example, based on a $100,000 investment, after 10 years of accumulation, and 20 years of withdrawal there is a 95% likelihood of meeting retirement goals with an IOVA vs. a traditional VA with guarantees. With our IOVA, we stripped away these complex fees and focused on accumulating assets in a tax-deferred investment vehicle.
4. Liquidity
Most annuities make it difficult and expensive to withdraw your investments. With lock-up periods often as long as eight years, contract holders are forced to pay a hefty fee if they need their money before that period is over. Our IOVA, on the other hand, eliminates early withdrawal fees, allowing investors to withdraw their money whenever they want. No surrender period or surrender charges.
5. Returns
Edelman puts this plainly: “The low interest rates offered by fixed annuities don’t require elaboration. And the returns of variable annuity subaccounts are reduced by the fees mentioned earlier.” I agree 100 percent. What’s the point of using a tax-deferred account if you’re going to negate those benefits by tacking on large fees that take a chunk out of your returns? If you use the low-cost, flat-fee IOVA, however, tax-deferral can increase returns by 100-200 bps every year—without any additional risk. Add that up over 20 or 30 years, and it makes a significant difference to your income in retirement.
6. Early Death Protection
Investors want to make sure their families are financially secure in the face of an unexpected accident; therefore putting some kind of insurance in place is a wise choice. During the accumulation portion of an annuity—i.e., before you start to take withdrawals—your account will be passed to a beneficiary if something happens to you. We agree, if your focus is on the death or longevity benefit, there are other investment options out there that make more sense, such as life insurance or an immediate annuity. However, if your focus is on helping clients accrue the most wealth for their retirement during the accumulation phase, than the low cost IOVAs designed to take advantage of tax deferral may be your best option.
7. Longer Life Expectancy
Humans are living longer, which poses an issue for annuity companies that must fulfill their promises of continual payouts as more contract holders live longer and collect more distributions. However, as more people are living longer, they are also delaying retirement, which means more time for your tax-deferred investments to grow. We purposefully designed our IOVA to maximize every benefit that a tax-deferred wrapper offers during the accumulation phase so that advisors and their clients are put in the best position for planning for retirement.
As Mr. Edelman outlines, annuities have often become a burden on investors—with expensive riders and long lock-up periods—rather than the tax-deferred wealth generators that they were originally intended to be. It’s true, annuities aren’t the right fit for every case. But as IOVAs continue to evolve, the power of a low-cost, flat-fee tax-deferred investment vehicle shouldn’t be understated or lumped in with poorly-designed products that muddy the waters of the industry as a whole. We would happily welcome any questions from Financial Advisor magazine readers who are looking to help their clients who are unsure of how to navigate the annuities world—please feel free to call our dedicated Advisors Sales Desk at 866.667.0564.
Laurence Greenberg is president of Jefferson National, innovator of the industry’s first flat-fee investment-only variable annuity with the largest selection of underlying funds, which was recently named in Barron's list of Top 50 Annuities for a third consecutive year. For more information, please visit www.jeffnat.com or call 1-866-WHY-FLAT (866-949-3528).
Important Disclosures:
Variable annuities are investments subject to market fluctuation and risk, including possible loss of principal. Your units, when you make a withdrawal or surrender, may be worth more or less than your original investment.
Variable annuities are long-term investments to help you meet retirement and other long-range goals. Withdrawal of tax-deferred accumulations are subject to ordinary income tax. Withdrawals made prior to age 59½ may incur a 10% IRS tax penalty. Jefferson National does not offer tax advice. Annuities are not deposits or obligations of, or guaranteed by any bank, nor are they FDIC insured.