Bibliography

Merits Of Using A Deferred Annuity To Fund An IRA,

401(k), 403(b) Or Other Tax Qualified Retirement Plan

 

Table 1 (independent views)  Part 1  Part 2  Part 3  Part 4  Part 5  Part 6

Table 2 (annuity industry views) - Part 1  Part 2

 

 

Table 1, Part 3

(independent views)

 

 

 

 

Citation

Summary Excerpt

200

Liz Pulliam Weston, “Here’s One Sales Pitch That Says It’s Time To Shop For New Advisor,” Los Angeles Times, April 15, 2001 at C3

A reader asks about his financial advisor’s recommendation to take his $80,000 in a previous employer’s 401(k) plan and start a rollover IRA funded by a variable annuity. 

 

Ms. Weston replies that “[g]ood financial planners hate, simply hate, the kind of advice you just got.”

 

“Variable annuities' main selling point is that your gains will be tax-deferred. But your gains within an IRA are already tax-deferred. So you're paying a bunch of fees and expenses for something you've already got. 

 

There are some financial planners who think it should be illegal to sell a variable annuity for an individual retirement account. No less an authority than the Securities and Exchange Commission has warned that variable annuities typically don't belong in IRAs. 

 

Yet advisors like yours continue to push the idea that variable annuities are a dandy idea for an IRA.” 

 

VAs “tend to pay a higher commission than a mutual fund purchase or a stock transaction, which is probably why you got the advice that you did.  Then again, maybe this guy did you a favor. If this is the quality of the financial planning he's going to offer, it's best to know that now so you can start looking for a replacement.”

199

Frank Armstrong, “Making Sense Of Annuities,” investorsolutions.com, April 2001

“Simply put, there is no justification for using an annuity inside any qualified plan. The qualified plan itself provides the tax advantages and deferral. Annuities provide only additional costs and a drag on performance. Dump them!”

 

Frank Armstrong, CFP, is the author of Investment Strategies for the 21st Century, President of Managed Account Services, Inc., a fee-only Registered Investment Advisor, and Chief Investment Strategist of DirectAdvice.com. 

 

This article was also published by Brill’s Mutual Fund Interactive.

 

198

Michele M. Capots, “Savings Shock,” Teacher Magazine, April 2001

Due to high fees and poor investments, novice investors in 403(b) plans are discovering that they are reaching retirement age “with nothing more than chump change.”  School districts “typically don't educate teachers about investment options, says [Don] Kuehn [senior national representative for the American Federation of Teachers], and agents take advantage of this. ‘[Many] are sharks that prey on unknowledgeable people and sell them these plans at the largest commission,’ he says.”

 

197

Ric Edelman, “Are You Buying Annuities When You Shouldn’t Be?,” Inside Personal Finance, April 2001

“[A]nnuities should only be purchased if the money is not being invested in a tax-deferred account[.]”

 

“[T]he NASD seems to be acknowledging that advisors are acting improperly because their firms are encouraging them to do so.  In other words, we don’t merely have a here-and-there bad soldier; we have an entirely bad army, led by generals issuing improper orders.  If the story is true, and if, indeed, the NASD slams these firms, we could see a huge wave of class-action lawsuits on behalf of millions of investors.”

 

196

Managing Your Money, Live Chat Transcript,” usatoday.com, March 29, 2001

Chat is hosted by USA Today personal finance columnists, Sandra Block and John Waggoner, who write: “Truly awful advisers will put a variable annuity in an IRA, which does little good for anyone -- except, maybe, the advisor.”

 

195

Kristin Baird Rattini, “The ABCs of Annuities,” Credit Union National Association, Inc., February 2001

“[D]on’t buy an annuity within an IRA or retirement account, warns [Laura]] Tabox [a certified financial planner with Tarbox Equity, Inc. in Newport Beach, Calif.]. `You’d be paying extra to put a tax-deferred investment inside a vehicle that’s already tax-deferred,’ she says.”

194

Rick Bloom, “Keep Variable Annuity Out Of IRA,” DETROIT NEWS, January 7, 2001

Reader with a variable annuity in her IRA needs to know that a “variable annuity never belongs in an IRA” because “you pay the fees to receive tax deferral” and you are also “limiting your investment options unnecessarily.”

193

Eric Tyson, “Your Money,” Washington Times, December 27, 2000 at B9

A reader writes that, “[b]ased on my experience as a CPA,” he sees many annuities “being sold in retirement plans (IRAs, 401(k)s, SEP plans, etc.), which I find ridiculous.”  Mr. Tyson states: “I agree with your assessment of brokers selling people an annuity inside of a retirement account.  Since a retirement account already provides a tax shelter, it makes no financial sense to pay extra for an annuity that also provides a tax shelter.”

 

192

Editorial, “Insurers Need To Clean Up Variable Annuity Sale Abuses,” Investment News, November 6, 2000 at 10

“[S]ome companies have been engaging in patently inappropriate practices, such as selling variable annuities to people with tax-deferred retirement accounts.”

191

Peter Weaver, “Caution When It Comes To Variables,” MyBusiness Magazine, Nov./Dec. 2000

“Some eager sales people sell variable annuities as investments to go into an IRA or 401(k) retirement plan.  `This is a ridiculous redundancy because you’re putting a tax deferred vehicle inside another tax deferred vehicle,’ says Victoria Collins, an Irvine, Calif.-based financial planner[.]”

 

190

Richard Bierck, “Should You Buy?,” Bloomberg Personal Finance, November 2000

“As a horde of salespeople routinely pester middle-aged and older Americans to purchase annuities, many of us doubtless are wondering whether this would be a smart investing move.”

 

Annuities are being sold to people who have not yet maximized their qualified plans.  “Even worse, uninformed consumers are sometimes sold variable annuities as something to hold within an IRA, so they end up paying high fees for tax deferral that they're already getting.”

 

189

Jeffrey R. Kosnett, “Annuity Blues,” Kiplinger’s Personal Finance  Magazine, November 2000 at 50

“[A]mid a rising chorus of complaints about how variable annuities are priced and sold” there are millions of Americans who face a “quandary: They own variable annuities inside tax-deferred retirement programs, such as 401(k) and 403(b) plans, and are paying stiff fees for little benefit.”

 

“Regulators, too, are questioning the use of annuities inside qualified retirement plans. Last year, the National Association of Securities Dealers notified all brokers, financial planners and insurance agents who recommend annuities for 401(k) plans and rollover IRAs that they should disclose to clients that the tax-deferred feature is unnecessary.”

 

“Industry proponents say that using an annuity in a qualified retirement plan is the only way to assure a participant of the right to a guaranteed stream of income when he or she elects to receive a series of monthly payments (an option known as annuitizing). But that’s not so. Anyone can buy an immediate-pay annuity, arranging for monthly checks for life or for a specified period, such as 20 years.”

 

188

Moshe A. Milevsky, Ph.D. with Michael Posner, The Probability Of Fortune: Financial Strategies With The Best Odds (Stoddart 2000) at 84-85

“[I]n my view, the most likely reason for the higher fees [for variable annuities] is that insurance companies have been granted monopoly power to manufacture a tax-favored product.  Naturally, like all good monopolists (or even a cartel), they charge a price that far exceeds the product’s cost of production.”

 

“Paying extra fees and expenses for the privilege of using tax breaks and shelters is not very different from the fact that yields on tax-free municipal bonds are always lower than yields on bonds of equal financial risk.”

 

“One last word of advice.  If you do want to buy a variable annuity, don’t put it in a qualified (tax-deferred) retirement plan.  You’d be far better off reserving that space for investments that actually need the shelter.  Otherwise, you are in effect taking two (expensive) umbrellas to work.”

 

187

Dr. Don Taylor, “30-Something Investor On Track To Retire At Age 55,” TheStreet.com, October 19, 2000

There's no compelling reason to hold an annuity in a 403(b) plan, and a host of reasons not to own them in a tax-deferred account like a 403(b). . . . continued contributions to an annuity within a 403(b) is a belt, suspenders, boxers and briefs approach toward investing for retirement. Once you've stopped the contributions, figure out how much it's going to cost you to withdraw the money already invested in the annuity and reinvest it in another plan option.”

 

186

Dan Otter, “10 Facts On 403(b)s,” fool.com, October 16, 2000

“It's not uncommon for teachers to be limited to annuity products, with no direct access to mutual funds. Why should this matter? Financial planners are nearly unanimous in their aversion to annuity products within retirement plans. In addition to the higher fees, financial planners argue that it is redundant to put a tax-deferred investment (an annuity) into a tax-deferred plan -- a 403(b). Furthermore, many annuity products contain dubious exit clauses and penalties.”

 

Dan Otter teaches fifth grade at McKinley Elementary School in southern California. He also runs a 403(b) advocacy website -www.403bwise.com -- dedicated to educating educators about the 403(b).

 

185

Best Variable Annuity Strategies,” Bob Carlson’s Retirement Watch Online, October 2000

“Investors continue to pour money into variable annuities, many for the wrong reasons. It's easy to understand why. Variable annuities are complicated. They also pay high commissions, encouraging strong sales efforts.  Perhaps that is why about 14% of IRA-owners have all or part of their IRAs in variable annuities” which the author describes as one of the “mistakes” buyers make with variable annuities.

 

 “If the variable annuity provides tax-deferral, why buy it through IRAs, which also are tax-deferred? Why not simply buy mutual funds directly through IRAs?”  Term insurance is more economical than a variable annuity death benefit and persons interested in annuitization can shop for the best rates on an immediate annuity when they are ready for income.

 

Bob Carlson is an attorney, a CPA and licensed insurance consultant. Since 1992 he has served on the Board of Trustees of the Fairfax County (Va.) Employees' Retirement System and has been elected chairman of the board by his fellow trustees since 1995. He also serves on the Board of Trustees of the Virginia Retirement System, a $35 billion fund. He is the owner of Carlson Wealth Advisors, LLC, a registered investment advisory firm.

184

Rick Bloom, “Switching 401(k) To Annuity Is No-No,” Detroit News, September 24, 2000

A “friend” has advised a reader to roll over her 401(k) plan money to a Best of America contract from Nationwide Life. 

 

“I agree that it makes sense to move the money, but not into a variable annuity. The Best of America is a variable annuity and on the whole variable annuities make no sense for a retirement account. 

 

The advantage of a variable annuity is that it grows tax-deferred. However, since this is a retirement account, it is already tax-deferred, so a variable annuity provides no benefit.”

 

183

annuityscout.com, “Annuity Shopping Is Safer And Easier When You Avoid These Common Mistakes,” Business Wire, September 20, 2000

The number one most common mistake when buying an annuity is  “sheltering the `wrong’ money from taxes.”

 

“Remember, the money in your IRA, 401[k] and 403b grows tax-deferred wherever it's invested, so it doesn't need to be invested in an annuity. Typically (barring special needs) an investor should put the tax-qualified funds somewhere else, such as a brokerage account, mutual funds, managed account, even a certificate of deposit. So, fully fund your IRA, Roth IRA, or 401K first (particularly if your company matches your contribution), then consider an annuity to tax protect additional funds. Annuities accommodate larger sums of money than IRAs and these other plans, allowing you to save more on a tax-deferred basis.”

 

182

Liz Pulliam Weston, “Rolling 401(k) Into Shady Venture Is No Way To Make Up For Lost Time,” Los Angeles Times, September 10, 2000

“If you’re a regular reader of this column, you know what I think about variable annuities in general and about investing in them within an IRA in particular.  If you’re new to the column, let this suffice: Don’t do it.”

181

Ann Perry, “Teachers Find Retirement Planning Is No Snap Course,” San Diego Union-Tribune, September 3, 2000

Pat Quigley, a CFP with MetLife Resources in San Diego, is quoted: “`The higher the commission the more egregious the charges,’ Quigley says. `Some of the stuff people have been sold through the years -- I’d view it almost as malpractice.’”

 

“Independent financial advisers also point out there is no need to pay the extra costs associated with an annuity, a tax sheltered investment, if you have a 403(b) plan, which already is tax-advantaged. `The use of annuities in a retirement account is not a wise move,’ [Dale] Cors [a financial adviser with Financial Network Investment in San Diego] says.”

 

180

Gary Schatsky, “Brush The Annuities Out Of Your Hair,” worldlyinvestor .com, August 22, 2000

“Annuities have no place in an IRA. They have high commissions, high operating expenses and limited fund choice.

 

In the limited instances they are appropriate, annuities are used to defer taxes for high-income individuals with a tremendous amount of excess cash to invest. You never should have had them in your IRA and it is unlikely they were appropriate for your ``non-qualified'' (non-IRA) assets even when you were working.”

 

The columnist is Chairman of the National Association of Personal Financial Advisors (NAPFA).

 

179

Arleen Jacobius, “Fidelity Quizzes 403(b), 457 Participants,” Pensions and Investments, July 24, 2000 at 42

Annuity investment vehicles have extra layers of fees that include surrender penalties, he said. But the insurance agents sell them by stressing their tax advantages.

 

`The attraction of these annuities is that they are tax deferred, but you can only defer once and the 403(b) plan is already tax deferred,’ [Neal] Wolfson [national partner with KPMG in New York] said. `It's like putting municipal bonds in a 401(k) plan.’”

 

178

Paul J. Lim, “Retirement Plans Come In Various Flavors - 403(b)’s Can Leave A Bad Taste,” US NEWS & WORLD REPORT, July 10, 2000 at 57

Millions of Americans -- chief among them teachers and amny nonprofit workers -- are “making do with a retirement system that’s not only separate but decidely unequal. . . In part, this is because 85 percent of the $520 billion in 403(b)’s sits in fixed and variable annuities[.]”  “Many teachers. . . assume that they must invest in an annuity because the old-fashioned name for a 403(b) is a `tax-sheltered annuity,’ notes Michael Burke, 53, a 10th-grade teacher in the Dallas SAchool District.” 

 

The higher costs compared to mutual funds is not minor -- “compounded over the course of a career, they can easily add up to tens, if not hundreds, of thousands of dollars.” 

 

“[M]any planners say that it’s unnecessary for participants to invest in annuities because 403(b)s, like annuities, are tax-deferred.” 

 

177

Brian Conners, “Variable Controversy,” financial-planning.com, June 22, 2000

This is an online chat with Brian Conners, a CFP licensee with Professional Financial Advisors in San Juan Capistrano, Calif. and co-author of Planning for the Golden Years with Variable Annuities.  He is asked whether variable annuities belong in tax qualified accounts:

“There is no benefit to putting a VA into an IRA. Basically because tax deferral is already a feature of IRA investments. So the additional cost and expense of VAs reduces the long-term investment performance without any additional advantage other than perhaps death benefits. It's a disadvantage because tax deferral is already taken into account. We would not recommend a VA to be used in an IRA or a tax-deferred retirement account such as a 401(k).”

He is also asked why insurance companies, such as SunAmerica, promote them for qualified plans?

 

“Well, I think it's obviously unfortunate that this is happening. My opinion is it's a misuse of VA products to place those into a 401(k) plan. As for companies that sell VA products, it does the industry a disservice to sell VAs into retirement plans such as IRAs and 401(k) plans that do not add a lot of value other than death benefits. I think the merits of VAs justify themselves, but not in pre-taxed retirement plans. This is probably one reason why there is so much scrutiny in the industry about this kind of sales tactics, which detracts from the real benefits of VA's when used appropriately.”

 

176

Jeff Brown, “Cooling Down Hot Annuities,” Philadelphia Inquirer, June 8, 2000

“Americans now have about $1.2 trillion tied up” in annuities, and the SEC is “[c]oncerned that many investors don’t understand the potential drawbacks to these complex retirement investments[.]”

 

In its online brochure, the “SEC is especially concerned that some investors are buying annuities for their IRAs. Because the annuity already has a tax deferral, there’s no reason to put one in an IRA.”

 

175

Variable Annuities: What You Should Know,” Securities and Exchange Commission, June 2000

The SEC issues its first consumer brochure on variable annuities.  The brochures states that most investors should fund all available qualified plans before considering a variable annuity. 

 

Under the heading “Caution!,” the brochure states:

 

“Other investment vehicles, such as IRAs and employer-sponsored 401(k) plans, also may provide you with tax-deferred growth and other tax advantages. For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity.”

 

“In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection.”

 

In a press release, Paul Roye, Director of the SEC’s Division of Investment Management, said the brochure “highlights several areas where investors need to exercise caution and ask hard questions of their financial professional - the use of a variable annuity in an IRA or other tax-deferred vehicle, fees and charges, tax-free exchanges, and bonus payments.

 

174

Joseph B. Treaster, “S.E.C. Plans Warning On Annuities,” New York Times, June 4, 2000

The SEC will issue its first ever consumer warning about variable annuities that is “filled with cautionary passages clearly designed to make a potential buyer stop and think[.]”

 

“While one of the main advantages of variable annuities over mutual funds is that investments are not taxed until the time of withdrawal, the agency notes that Individual Retirement Accounts and 401(k) retirement plans, which offer the same feature at no cost, `are often more advantageous than variable annuities.’

 

Several pending lawsuits accuse variable annuity companies of inappropriately selling variable annuities to IRA and 401(k) investors, giving them a useless, double tax deferral feature at a higher expense than if mutual funds had been used.”

 

173

Alan Feigenbaum, “The Fleecing Of 403(b) Plan Participants: Teachers Among The Most-Victimized By Annuity-Based Plans,” cbs marketwatch.com, May 30, 2000

“The IRS calls the 403(b) a "tax-deferred annuity," but it's the rare insurance agent who will explain that is only terminology, and you don't have to invest in an actual annuity. In fact, buying a tax-deferred annuity in an already tax-deferred plan is a needless redundancy. If you already know that, and ask for other choices, those same agents might try to sell you on an annuity's death-benefit provision, which guarantees that you'll get back at least what you put in. That's a sucker's benefit, because impartial financial planners will tell you that most any mutual fund will net you significantly more over a time horizon of five years or more.”

 

172

Jan Warner and Jan Collins, “Variable Annuities Has Drawback,” Columbia The State (Columbia, S.C.), May 17, 2000

The syndicated columnists write: “Some salespeople have been known to convince customers to buy variable annuities in tax-deferred IRA’s and retirement accounts, which is a complete waste of the tax-shelter benefit of insurance.”

171

Eric Tyson, “No Matter How Small, A Retirement Investment Should Meet Your Needs,” Seattle Post-Intelligencer, May 8, 2000

The syndicated columnist explains to a reader considering an annuity for a rollover IRA that she should “recognize that the annuity you were pitched carries unnecessary and extra fees for the tax shelter it provides, which you don't need since the money can already be inside a tax-advantaged IRA.”

 

170

Hap Bryant, “What To Do With Your 403(b),” Morningstar.com, May 5, 2000

“[A]nnuities were the only choices the law allowed [for funding 403(b) plans] until the early 1970s. As a result, insurance companies selling annuities established a stranglehold on the 403(b) market. They still make scads of money from annuities and much less from mutual funds, so they don’t have a reason to shake things up.”

 

“Even outside such plans, annuities avoid taxes, so there’s no point in keeping them in a tax-deferred account. What’s more, funds usually offer higher returns.”

 

169

Rick Bloom, “Don’t Incur Extra Fee For Annuity,” Detroit News, May 5, 2000

A readers says her advisors told her an annuity makes sense for her SEP IRA because it would have lower administration fees and a 1% bonus on contributions.  Mr. Bloom points out that with the insurance charges the overall fees are higher.  “Why incur an extra fee to receive tax-deferral when you already have it? Even if you are required to pay a penalty, you should cancel the annuity and open a new SEP.”

 

168

Laura A. Bruce, “What Is An Annuity And Does It Belong In Your IRA Portfolio?,” bankrate.com, May 1, 2000

“Money in an annuity grows tax-deferred, you're paying a fee to the insurance company. Why pay a fee for a tax-deferred account when your 401(k) does it for free?”

 

 

167

Don Kuehn, “Shark Attack!,” American Teacher, May/June 2000

“The problem with buying an annuity inside a tax-preferred investment vehicle like a 403(b) is that earnings on the annuity are already tax sheltered. It's like buying an umbrella exclusively for indoor use.”

 

 “The marketing of 403(b) products to school employees typically depends more on the one-on-one relationship between the sales agent and the prospective customer than it does on the investment's cost, expected returns or its features.”

 

“That makes public school and college employees easy prey for the sharks who feed on these plans.”

 

The author is a senior national representative with the American Federation of Teachers in Washington, D.C.

 

166

Deborah Lohse, “Chamber Of Commerce Picks SunAmerica For 401(k) Plans,” Wall Street Journal, April 26, 2000 at C22

“Critics argue that putting annuities into tax-deferred plans provides a benefit - tax deferral - that is of no value to 401(k) investors. That is because any investment put into a 401(k) acquires tax-deferred status. And variable annuities often sport higher fees than mutual funds, partly because of the tax-deferral feature.”

165

John Waggoner, USA Today Online, April 21, 2000

The columnist writes: “Far too often, unscrupulous brokers will recommend a variable annuity within an individual retirement account -- an arrangement that one financial planner likened to wearing two pairs of underwear.”

 

High commissions means that variable annuities are “often sold, and sold hard. . . . In the worst case, brokers will try to put individual retirement accounts into variable annuities, an utterly pointless exercise that’s getting some notice in court.”

 

164

Albert B. Crenshaw, “Room To Play In An IRA? Tax Advantages Can Make Frequent Trading Viable,” Washington Post, April 16, 2000 at H02

“Remember not to double up on tax preferences. That’s a waste of money, which might seem obvious, but a surprising number of people buy municipal bonds or tax-deferred annuities in their IRAs.”

 

 

163

“Ask An Expert,” quicken.com, April 2000

A reader asks: “Generally, are annuities a good choice for contributing to in a 401(k) plan?”

 

The expert, Robert W. Tull, Jr., a Certified Financial Planner professional based in Chesapeake, Virginia, with over 14 years of retirement and estate planning experience, responds that the answer “is no.”

 

“[W]hy would you take this tax-deferred box and place it inside a 401(k) plan that is already tax-deferred. You are adding additional costs to your plan without adding significant value. I find that annuities are used in 401(k) plans when employers don’t take the time to examine the inside the box as it pertains to the expenses.”

 

162

David Franecki, “Just Say No To Annuities,” Barron’s, March 27, 2000 at R12

Under the heading “The $6.4-Billion Ripoff” the article states:

 

“Variable annuities, like life insurance, are sold, not bought. Look no farther than the fact that almost half of the money in variable annuities is held in qualified retirement plans like IRAs. That's right. Investors have been hornswoggled into paying exorbitant fees -- 1.28% of assets annually on average -- to get tax-deferred status in an account that's already tax deferred.

 

We're talking big money here -- roughly $500 billion -- most of which made its way into IRAs from other retirement plans, like 401(k)s and 403(b)s. That means investors are paying annuity firms some $6.4 billion a year in unnecessary fees - money that is, in turn, shared in commissions with the brokers and financial planners who advised their clients to roll their retirement plans into variable annuities in the first place.”

 

161

Rick Bloom, “High-Fee Investment Does Not Belong Within A Retirement Account,” Detroit News, March 13, 2000 at 4

A reader has a Nationwide Life Insurance Best of America variable annuity in her IRA.

 

“I have a major problem with the Best of America Annuity. . . . There is absolutely no advantage for an investor to hold a variable annuity within a retirement account.”

 

Mr. Bloom recommends that when the surrender penalty on the annuity in the IRA is 5% or less, the reader should pay the penalty in order to invest elsewhere.

 

160

Lynn Brenner, “Annuity Holds No Tax Advantage Over IRA,” Newsday, March 5, 2000 at F04

“Annuities are tax-deferred - it’s their big selling point. But so are IRAs. `Putting IRA money in an annuity is pointless, even if the annuity doesn’t have a sales or surrender charge,’ says Larry Elkin, a financial planner in Hastings-on-Hudson. `You already have a tax-deferral on this money.’”

 

“`You may decide that you want an immediate-pay annuity when you retire,’ Elkin says, `but what’s the hurry? For now, it’s cheaper and just as tax-deferred to leave your money in the IRA.’”

 

159

Scott Burns, “Possible Shift In Pension Plan Worries Worker,” Dallas Morning News, March 2, 2000 at 1D

A reader is concerned that his university employer has too many variable annuity vendors on its 403(b) plan approved vendor list.  Mr. Burns argues that public employers must take more active role or face potential liability.  “[F]ederal regulators have said that they would pay attention to the use of variable annuities in qualified plans, arguing--- as I have for years--- that the additional costs of variable annuities are unnecessary and redundant.”

 

158

Laura Lallos, “Why Buy A Variable Annuity,” Morningstar.com, February 28, 2000

“Annuity salespeople have it made. Even knowledgeable do-it-yourself investors find their eyes glazing over in face of all the annuity options and various permutations--immediate vs. tax-deferred, fixed vs. variable, death benefits. Unfortunately, too many people are paying up for ignorance. Many have even ended up buying variable annuities within 401(k) and IRA accounts. (If you don't know why you should be horrified by that, read on.)”

 

157

Do You Own An Annuity Inside Your IRA?  Better Read This,” Financial Sources, Inc., March 2000

“The primary advantage of annuities is the tax deferral. But your IRA is already tax deferred, so why did your broker advise you to buy an annuity inside your IRA?

 

“It could be that your broker or agent works for a company that pushes annuity sales or pays them a better commission for annuity sales. Or possibly, your advisor did not know any better.”

 

Financial Sources, Inc. is located in Bethlehem, PA.

 

156

Eric Tyson, Personal Finance for Dummies, 3rd Edition (IDG Books, March 2000) at 226

“Some investments for retirement accounts are simply inappropriate. . . . Annuities, although retirement vehicles, as noted earlier in this chapter, have no place inside retirement accounts. . . .  Purchasing an annuity inside an IRA, 401(k), or other type of retirement account is like wearing a belt and suspenders together. . . . In my experience, many people who mistakenly invest in annuities inside retirement accounts have been misled into the investment by investment salespeople.  . . . The insurance companies behind these products, in their enthusiasm to pump up salespeople to peddle them, conveniently skip over the details about when it’s appropriate to invest in annuities and when it’s not.”

 

155

George Chamberlin, “An Annuity Inside an IRA? Don't Be Ridiculous,” San Diego Business Journal, February 21, 2000 at 47

A reader writes that her financial advisor is recommending an annuity for her IRA.  The columnist writes: “[t]hink about what is being suggested. By definition an IRA is a tax-sheltered account. The traditional IRA is a tax-deferred vehicle that allows the money to grow without any current tax liability. The new Roth IRA is a tax-free account that eliminates all taxes if held for five years or longer.

 

Now, consider the advantages and benefits of an annuity. These insurance contracts allow for the tax-deferred growth of money. No taxes are due until the funds leave the annuity.

 

So, what's wrong with this picture? Why would you want to put a tax-deferred annuity inside an already tax-sheltered IRA account? For the life of me I cannot think of a single reason. It's like walking in the rain with two umbrellas. I doubt you will stay any drier with two instead of one.”

 

Mr. Chamberlin refers to the death benefit as a “sucker bet” because the market has always been up over any ten year period.

 

“The main reason advisors tout annuities for IRAs can be summed up in one word: commissions.”

 

“Annuities can be good investments in the right set of circumstances. But, inside an IRA is never the right circumstance.”

 

154

Rob Rikoon, “Annuities Probably Not A Good Idea For Most Investors,” Santa Fe New Mexican, February 8, 2000 at C1

“Some salespeople began to get their customers to put annuities into IRAs. Buying an annuity in an IRA is a bit like taking a shower while wearing a raincoat; the raincoat is simply `in the way.’ IRAs are already tax-deferred so using an annuity for this purpose just doesn't make sense.

 

Since the main advantage of an annuity is income-tax deferral and since an IRA already has these features, buying an annuity doesn't make sense for an IRA or any other retirement plan.”

 

The author is president of Rikoon Investment Advisors, New Mexico's largest independently owned investment management firm.

 

153

Lynn O’Shaughnessy, “Making More of Your 403(b),” Mutual Funds Magazine, February 2000 at 53

“Annuities. . . are far from ideal. First, why would tax-sheltered 403(b) investors want to pay for a tax-sheltered product like an annuity? Annuity fees are often stiff, including sales commissions that can range from 5% all the way to 12% or so. Unneeded insurance coverage also boosts costs.”

 

152

Kenneth Black, Jr. and Harold D. Skipper, Jr., Life & Health Insurance, Thirteenth Edition (Prentice Hall, January 2000) at 179

"Annuities can be used to fund IRAs, although such usage may make little financial sense because one is placing a tax-preferenced instrument in a tax-preferenced plan -- often an unwise move."

 

151

MOSERS’ Investment Staff, “Deferred Compensation Plan,” Value Added, January 2000

The newsletter, by the Investment Staff of the Missouri State Employees Retirement System, is produced and distributed in advance of each scheduled MOSERS' board meeting with the objective of educating the trustees regarding investment issues facing the pension fund.

 

While previously it was common for 457 plans to be set up inside a variable annuity format similar to the current Missouri public employees’ 457 plan, “[m]any plans around the country have abandoned the variable annuity approach and, in doing so, have removed a layer of confusion and fees from their plans.  The variable annuity feature is not beneficial, since the 457 plan is already tax deferred.  The annuity is redundant in that the income can only be tax deferred once.  This criticism of the variable annuity approach is what has prompted many plans to change.”

 

 

 

Table 1 (independent views)  Part 1  Part 2  Part 3  Part 4  Part 5  Part 6

Table 2 (annuity industry views) - Part 1  Part 2

 


See Part 1 for rights and permissions.

 

 

Ronald A. Uitz

Uitz & Associates

1717 K St NW Ste 600

Washington, DC 20036

202-296-5280