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In line with June being National Annuity Awareness Month , I’d like to also remind readers that fixed-index annuities, FIA, celebrated their 20th birthday this year.
As MarketWatch RetireMentors contributor and annuity expert, Stan Haithcock, reports “in 1995, Keyport, which is now Sun Life, introduced the first fixed index annuity.” Stan reminds us of the tainted history of the product by also stated that that day was also, “probably the genesis for the ‘bad chicken’ dinner seminar as well!”
Reno Frazzitta, founder and president of Secure My Funds, a Michigan based financial and retirement planning services firm, reminds us that, "When the FIA came to market in 1995, the product was an alternative to a mutual fund and geared toward the audience a few years away from retirement."
Reno finds that the interest in the product from his clients continues to grow, 20 years later, "With the aftermath of 2008 still living at the forefront of the millennial's mind, safety and security with their finances have become more important. It's also been suggested women between the ages of 35 to 45 are making an FIA a stronger part of their portfolio. This age group used to depend on the spouse's retirement options and unfortunately this just isn't an option anymore."
The same benefits that led to the "bad chicken" dinners seem to still draw interest from investors today. According to LIMRA, the FIA had an all-time high in 2014 . It held more than 50% market share of fixed annuity sales, which reportedly were up 21.3% just from the previous year.
When the FIA was introduced, advisers and insurance agents rushed to sell a "Vanguard-like equity index" product with insurance against downside risk. It sounded too good to be true and the money poured in. The appeal and often aggressive sales practices around the product led to alerts from Finra stressing that investors should read the "fine print,” and regulations (since overturned) that attempted to regulate them as securities (the index is based on equities after all) requiring sales only by registered representatives.
However, advisers such as Reno recognize that the product should only be positioned with appropriate clients and the benefits for these clients can be realized in their retirement income. Reno points out his own recent experience with a client, "I just had a client who accumulated great wealth in the market through her earning years, but in the last decade took a 40% loss. She was close to retirement and didn't want to take the chance on this happening again. By adding an FIA, it provided a safe floor so she couldn't go backward, and provided enough liquidity for living expenses. She's now withdrawing 5.5% of that money every year to live and without worrying about losing it."
Reno does recommend that investors do read the fine print and he'll review these details with each of his clients, and he goes on to note that, "As with making any kind of commitment to a product, it's important to know all the facts. It's important to do the research, there are fees associated and additional riders that come at a cost. With that being said, the costs are very comparable to the cost of a mutual fund. And at the end of the day, a person won't capture the full market gain, but there will be a guaranteed safety net in place. There's always a trade-off to every investment. Working with an expert is the first rule of thumb to determine what will be the best strategy to achieve future goals."
Reno also informed me that his clients prefer his advice to "bad chicken" any day.