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 2, Part 1

(annuity industry views)

 

 

 

Citation

Summary Excerpt

70

Gary S. Mogel, “One on One With Bob Cassato of John Hancock Financial Services Inc.,” INVESTMENT NEWS, May 1, 2006 at 35

Bob Cassato is executive vice president of distribution for John Hancock Financial Services Inc. in Boston.  He is asked: “Do you advocate selling tax-deferred variable annuities in qualified plans, given that these plans already provide tax deferral to clients?”  Mr. Cassato responds: “VAs can be in qualified plans, because tax deferral is no longer the primary selling point for VAs.  The primary selling points are the living benefits, which can provide a minimum 5% increase to the benefit when accumulating, and guaranteed withdrawals of 5% for life once the contract holder starts taking income.  About 75% of VA sales include living benefits.”

 

69

Warren S. Hersch, “The Allure of Guarantees: More Boomers Are Putting VAs In Their Qualified Plans or IRAs,” NATIONAL UNDERWRITER LIFE & HEALH/FINANCIAL SERVICES EDITION, April 24, 2006 at 8

The new guaranteed living benefits of variable annuities are attracting advisors to recommend variable annuities to risk-adverse baby boomers with IRAs and qualified plan money to invest, although “not all advisors see the guarantees as worth the extra fees, which can add two percentage points or more to the annuity’s cost.”  Kevin Meehan, a principal of CDHM Financial Advisors, of Itasca, Ill. says that VAs are increasingly price competitive with mutual funds, “a development he attributes to increased regulator scrutiny and bad press in prior years respecting the products’ high cost.” 

 

68

Joseph Matters, “Investing IRA Money In Annuities,” DAILY SOUTHTOWN (CHICAGO), February 5, 2006

The author is president of JM Financial Consultants in Homer Glen. 

 

“Many people feel that because of the tax-deferred growth of annuities, an IRA may be best suited for non-tax-deferred products.  One thing to remember is that although annuities are a tax shelter, they still have other features that make them attractive for IRAs.”  The author then discusses annuity payout options and includes that “Annuities offer a great place to park retirement dollars.”

 

 

67

Michael David Schulman, “A Primer on Annuities,” TAX ADVISER, January 2006 at 48

“Questions often arise regarding the suitability of annuity contracts within IRAs and pension plans.  As noted above, contract owners pay annuity companies for the privilege of having their money invested on a tax-deferred basis.  Because an IRA or pension investment is, by law, tax-deferred, there is no reason to incur these additional costs by placing annuities inside otherwise tax-deferred investments.  Nonetheless, many investors feel that the other benefits of variable annuities (i.e. professional money management, and income and benefit guarantees) make such investments suitable.”

 

The author is a registered representative authorized to conduct a securities business in five states.

 

66

Alan E. Peters, “Variable Annuities’ Guarantee Features Make Them Especially Attractive In Planning For Retirement,” INVESTMENT NEWS, November 28, 2005 at 10

The author is president of Alan E. Peters & Associates in Wilmington, Del.

 

He says that “there is no charge for the income tax deferral of the annuity” and that “the variable annuity offers significant benefits for retirement not available in most other mutual fund products.”  Given the “valuable riders” available with newer variable annuities, he thinks that “it is appropriate to recommend a variable annuity, among other investments, to any company or institution setting up a 401(k).” 

 

65

Betty Harris Custer, “Annuities Can Have A Place In IRA Plans,” THE CAPITAL TIMES (Madison, WI), September 3, 2005

The author is managing partner at Custer Financial Services in Madison, WI.

 

She argues that while the death benefit is one reason that financial advisors use deferred annuities in IRAs and other qualified plans, it is “usually the least important” reason.  The “real gem locked inside of that wrapper” is the option to convert the deferred annuity into a payout annuity. While acknowledging that it “is true that one could accumulate an IRA outside an annuity and then convert to an annuity for annuitization,” she states that “the advantage of locking in today’s annuity tables into existing contract benefits has value” without any actuarial analysis supporting her opinion.

 

64

Donald Jay Korn, “Perfect For Each Other?,” ON WALL STREET, January 1, 2005

“The bottom line is that billions of dollars are being invested ear year in variable annuities held inside of retirement plans.  Are investors being bilked?  Not at all, say many reps, who insist that clients are informed and are picking this structure for some good reasons.”

 

John Napolitano, chairman and CEO of U.S. Financial Advisors in Braintree, Mass., says that when suggesting a variable annuity for a tax-deferred account, there is a “huge fiduciary responsibility on reps” to make sure that clients are making informed decisions that the guarantees are worth the extra cost.

 

63

Gil Weinreich, “Seller Beware: With A Regulatory Crackdown Looming, Advisors Should Take Extra Precautions To Make Sure Any VA Sales Are In Keeping With Industry Best Practices,” RESEARCH MAGAZINE, August 1, 2004

An insurance wholesaler (marketing representative for an insurance company) saw his own mother nearly fall prey to a shady annuity salesman.  “The elderly woman’s entire net worth was in an IRA, and the broker proposed putting the funds in a variable annuity.  The broker met with her in her home, sweet-talked investments over milk and cookies before handing grandma a pen and the contract.  Fortunately, her son got wind of the deal while there was still time to rescind.”  Purchasing an annuity in an IRA is “only the best known annuity-related abuse by unscrupulous salesmen. . . [b]ut the overriding abuse involved in annuity sales is selling the product to the vast majority of investors for whom the product is not suitable.”

 

62

Gail Buckner, “IRA + VA = Bear Market Protection,” Fox News, October 10, 2003

The author has insurance licenses to sell variable annuities in all 50 states, and is a registered securities representative associated with Putnam Retail Management LP.

 

She writes that “while some people argue that it doesn’t make sense to invest an IRA in a variable annuity,” the death benefit is “bear market protection for your heirs.”  Without knowing how much was paid in insurance charges over the years, or what the death benefit was relative to the account value, she tells a reader whose deceased grandmother had a variable annuity in her IRA that his “grandma looks like one smart cookie” who “clearly. . .felt that the insurance was worth the cost.” 

 

61

Norse N. Blazzard and Judith A. Hasenauer, “Annuities Are Good For Tax-Qualified Retirement Plans,” NATIONAL UNDERWRITER LIFE & HEALTH/FINANCIAL SERVICES EDITION, April 7, 2003 at 14

The authors are annuity industry regulatory attorneys. 

 

The article does not distinguish between deferred annuities and payout annuities, but instead argues generally that lifetime income payments make sense for some persons.  The article does not mention that owners of mutual funds or any other investment can purchase a payout annuity in the future with their qualified plan assets if they decide they want one, and therefore do not need a deferred annuity to have this option. 

 

In support of the argument that it is the payout feature that justifies deferred annuities in qualified plans, the article claims that the charge for the death benefit feature of variable annuities is “usually separately stated” or is an “incidental” portion of the mortality and expense risk (M&E) charge, which, according to the article, is really for the insurance company’s promise to sell a payout annuity in the future to the deferred annuity owner at the contract rates.  However, the article does not compare the actuarial value of the insurer’s promise to sell a payout annuity in the future to the customer’s cost of paying M&E charges for decades.  There is no discussion of what types of individuals could know decades in advance that they are going to need a payout annuity. 

 

The article also observes that in 1974, just as defined contribution plans came on the scene, Congress amended section 403(b) of the tax code to allow 403(b) plans to invest in mutual funds, since there was no need to require payout annuities or impose any defined benefit requirement on 403(b) plans. 

 

60

John P. Huggard, “Do Variable Annuities Belong In Qualified Plans?,” ON WALL STREET, December 1, 2002

The author disagrees with critics who contend that putting a variable annuity in a qualified plan is redundant and inappropriate.  The article states that tax deferral feature of variable annuities “costs nothing” and therefore the higher fees associated with variable annuities cannot harm qualified plan investors because insurance “benefits account[] for the cost disparity.”  However, the article does not support this contention with any actuarial analysis.  In discussing the death benefit feature, the article omits any mention of the economics of protecting heirs with a tax-free payout from a life insurance policy, rather than a variable annuity death benefit that will be taxable to heirs to the extent it is ever triggered. 

 

The article also suggests that some states provide creditor protection for variable annuities inside IRAs, as opposed to IRAs funded by other investments, and therefore using a variable annuity in an IRA “to obtain creditor protection, even though the tax-deferral feature would be duplicated” can be worthwhile.  However, no such state is named and no caselaw or other legal precedent is cited.

 

The author is an estate planning attorney.  He teaches personal finance courses at North Carolina State University.  He is also a licensed insurance agent for the purpose of selling annuities.  His earlier articles lauding the tax advantages of variable annuities caught the attention of annuity insurers, and on their behalf, he tours the nation promoting the merits of variable annuities to their sales agents. 

 

59

Christopher Jarvis and David Mandell, “Variable Annuities, Depending On Terms, Can Offer Protection,” Business Courier (Cincinnati, OH), November 22, 2002

Although variable annuities have insurance features, some funds are not suited for a variable annuity. “First, we don’t recommend investing in a variable annuity within a retirement plan, as you are already getting tax deferral. . .  Unless your main concern is the death benefit, I wouldn’t recommend paying for the tax deferral twice.”

 

The authors are with Jarvis & Mandell LLC, a firm that according to its website provides “Wealth Protection planning to professionals, business owners, and wealthy families.”

58

“New Schwab Studies Shed Light On Variable Annuity Debate; Studies Look At Suitability of Annuities,” Business Wire, November 6, 2002

Two new studies from the Schwab Center for Investment Research provide “objective analysis on the factors that investors should consider when considering a variable annuity purchase.” 

 

“Through analysis of several key features of variable annuities, the study shows that it typically takes 5 to 15 years before tax benefits outweigh the often-higher fees imposed by variable annuities.”

 

The study also concludes: “As qualified retirement plans offer tax advantages beyond those offered in a VA, investors should generally contribute the maximum allowable amount to qualified retirement plans prior to contributing to a non-qualified VA. Moreover, it is generally not appropriate to purchase a VA within a qualified retirement plan.”

 

57

“Hartford Pioneer Still Bullish on VAs,” Insurance Chronicle, November 2001 at 1

Class action lawsuits that have been filed that, according to the article, assert that “sales of the products for tax deferred retirement accounts represent an actionable use of client funds.”  For 15 years, Peter Cummins has directed the variable annuities operation of The Hartford Financial Services Corp. and he “takes issue” with the lawsuits.

 

Peter Cummins says: “The most misunderstood part of a VA is tax deferral.  It is free.  Insurance companies do not charge for this feature.  The guarantees of minimum death benefit, annuitization, fixed accounts, spousal continuation, dollar cost averaging and other benefits makes variable annuities products appropriate for qualified plans.”

 

56

Patricia J. Abram, “It’s Time To Speak Out: Annuities Have A Legitimate Place In IRAs,” National Underwriter - Life/Health Edition, October 8, 2001 at 14

The author is senior vice president and chief marketing officer at American Skandia, Inc.  She argues that “annuities do have a legitimate place in IRAs.”

 

She says that a regulatory crackdown against deceptive sales of deferred annuities for IRAs has put so much “pressure” on insurance company sales representatives that many of these “investment professional have simply stopped using this strategy -- to avoid increased scrutiny by their broker/dealers.”  She concludes that the “regulators’ misinformed prejudice is tying the hands of those trying to do the best job they can for their clients.”

 

While acknowledging that there is “no question” that “VAs do cost more than mutual funds,” she states that a “person who makes a decision to purchase anything based simply on price, without any consideration of value, is a fool.”

 

Without any consideration of the value or cost of a VA compared to buying a life insurance policy, she asserts that “most Americans would gladly pay the increased cost of a VA, versus a mutual fund, for the sole benefit of the death benefit protection included in most of today’s VAs.”

 

55

Charlie Petrizzo, “A VA Inside An IRA?  Educate Clients, Let Them Choose,” National Underwriter - Life/Health Edition, September 10, 2001 at 20

The author is national sales manager for First Union Insurance Group, Charlotte, NC.  He argues that the VA death benefit feature can provide “economic value” to IRA owners.  He calculates the cost difference between the most expensive of the “B-share” mutual funds and the average VAs to be only 7 basis points (0.07%) more for the VA.  His analysis ignores commission breakpoints for mutual fund purchasers.  He also assumes, without disclosing his assumption, that all mutual fund owners will be churned every few years (to keep their expensive B-shares from converting to the lower A-share fee levels). 

 

54

Donald Jay Korn, “Happier Returns: Guaranteed Death Benefit Options Within Variable Annuities,” Financial Planning, July 2001

“Do variable annuities belong inside tax-deferred retirement plans, where their tax deferral is redundant?” Terry Mullen, a senior vice president with SunAmerica in Los Angeles , says the death benefit “may well be the deciding factor. There is no tax benefit to holding a variable annuity in an IRA but the guaranteed death benefit is an important reason to make this type of an investment." 

 

A new wrinkle to the death benefit feature in newer contracts, available at an extra cost, is an "enhanced earnings benefit" that will pay beneficiaries a percentage of contract gains, to offset the income taxes that are due as a result of using a VA to protect heirs rather than life insurance (life insurance pays a tax free death benefit). 

 

53

Evan Cooper, Susan Konig & Nancy R. Mandell, “Sold On VAs: These Brokers Have Made Variable Annuities A Major Part Of Their Business. Here's How They Did It,” On Wall Street, June 1, 2001

“[W]hen a VA is wrong, it's usually all wrong. For instance, one of the controversies associated with variable annuities is their value in an IRA.  ‘I'd never do a VA in an IRA,’ Manny [Manuel Rey, of A.G. Edwards & Sons, Inc., Short Hills, NJ] says. ‘The IRA itself is tax-deferred. Why would you put one tax-deferred vehicle inside another?’"

52

Kathleen Lynn, “Hard Lessons For Teachers; High Fees Cut Into Retirement Returns,” The Record (Bergen County, NJ), May 2, 2001 at B1

The variable annuity industry defends the products for 403(b) plans in the face of class action lawsuits and a regulatory crackdown.  Deborah Tucker, a spokesperson for the National Association for Variable Annuities, states that the ability to have payout options that provide an income for life, and the guaranteed death benefit, are important benefits.  Other industry spokesmen say that “the extra annuity fee helps pay for the commission” to a sales representative who “makes sure their 403(b) contributions stay within Internal Revenue Service limits.”

 

51

Christian Financial Network, January 2001

The web site markets the sale of fixed annuities and indexed annuities.  Under the heading “Should I put an annuity inside an IRA?” the article notes that advisors recommend against using deferred annuities in IRAs, but the purchase of a payout annuity for lifetime income with your IRA assets may be advantageous for some people.

 

50

Ron Panko, “Can Annuities Pass Muster?,” Best’s Review, July 2000 at 103

“The life insurance industry defends the use of annuities in tax-qualified retirement plans, pointing to a section of the tax code that allows for their use. Investors might want to include annuities in a tax-qualified retirement plan because of other benefits they offer, such as the right to annuitize, or convert the contract into a guaranteed stream of monthly payments for life.”

 

But some plaintiffs’ law firms have “uncovered some real-life evidence that sheds light on the issue.”  When Hartford Life was asked in the discovery process how much in death benefits the company had paid in the 17 years the San Diego and Los Angeles plans had existed, “Hartford claimed it had paid a single death benefit totaling only $119 in San Diego and no death benefits in Los Angeles.”

 

49

“American Skandia CEO Supports SEC Alert; Stands Up for VA Industry; Dokken Clarifies Remarks On Deceptive Sales Practices,” Business Wire, June 12, 2000

In response to the SEC’s consumer warning on variable annuities, a press release issued by American Skandia states:

 

“American Skandia CEO Wade Dokken issued a statement in response to the S.E.C.'s on-line alert, which maintains that it is inappropriate to sell variable annuities as part of a qualified retirement savings plan, based on any promised tax benefit. In agreeing with the S.E.C.'s remarks, Dokken said variable annuities funding 401(k) plans and other qualified plans are `appropriate, but not as a tax advantage.’

 

Dokken further explained: "Variable annuities offer qualified plans many advantages including multiple asset classes, a wide range of investment options, asset allocation programs, exchange privileges, death benefits, fixed accounts and annuitization rights. The tax deferral of the variable annuity is immaterial to the qualified plan sale," he said.”

 

48

Susan M. Miller, “Explaining Annuities To Prospects,” Life Insurance Selling, May 2000 at 42

The author oversees annuity sales at Revere Federal Savings Bank in Chelsea, Massachusetts.  She writes that, even though many brokers are opposed to selling qualified annuities because it is not in the best interests of their clients, her “philosophy” is “`why not?’”  She believes that the higher expenses for a variable annuity pay for the advantage of being able to “choose among many different fund companies in one product.”

 

47

Letter to the Editor, “In Defense of Annuities,” Barron’s, April 24, 2000

Bruce C. Long, President of Guardian Investor Services, responds to the “Just Say No to Annuities” article in the March 27, 2000 issue of Barron’s.

 

He writes that “variable annuities were specifically designed for the qualified market and have been recognized by Congress in specific sections of the Internal Revenue Code to be a legitimate funding vehicle for qualified plans.”

 

46

Letters to the Editor, Wall Street Journal, November 26, 1999

Letters from Mark J. Mackey, President and CEO, National Association for Variable Annuities, and Carroll A. Campbell, Jr., President and CEO, American Council of Life Insurance, protest the Wall Street Journal’s coverage of class action lawsuits against annuity insurers. “An annuity’s fee have nothing to do with its tax-deferred treatment, but are for getting the insurance features cited as appropriate by the NASD. To be sure, variable annuities’ insurance features help explain why they are an attractive and desirable choice for many retirement plans.”

 

45

“Forum: Do Variable Annuities Belong In Qualified Plans?” Annuity Market News, August 1, 1999

“Recently, variable annuities have been criticized for being included in qualified plans because an annuity duplicates the tax deferral that is already available within such plans. But the insurance industry argues that annuities have a long history in the qualified market, and their benefits go far beyond tax deferral.”

 

 

44

Thomas Streiff, “Facing Down the Negative Press on Fees,” National Underwriter, Life & Health/Financial Services Edition, July 12, 1999 at 9

The author defends qualified annuities on the basis that, although it is true that variable annuities have additional fees when compared to mutual funds, none of those additional fees are actually labeled as being for tax-deferral. Tax-deferral is “free.”

 

Moreover, the death benefit is a “perfect fit” for “risk adverse” investors.

43

Thomas J. McInerney, “Letter to the Editor,” The New York Times, July 11, 1999 at C16

The author is president of Aetna Retirement Services.

 

In response to the June 13, 1999 New York Times article on teachers fed up with annuities in their 403(b) plans, he states that Aetna “uses annuity fees to benefit the teachers and the school districts we serve,” such as by providing a “world-class call center” and “expert advice, information and personal service.”

 

42

“Qualified Plan Annuities Defended,” Insurance Accounting, vol. 10, No. 21, May 24, 1999 at 1

“Speaking at a seminar last week in New York [sponsored by the National Association for Variable Annuities], Joseph McKeever, partner in the Washington D.C. law firm of Davis & Harman, said that variable annuities originated in qualified plans dated back to the 1950s. `This is not a recent development or something the industry has just glommed on in the past few months.’”

 

41

Carroll A. Campbell, Jr., “Annuities Offer Unique Features, Flexibility,” Times Union (Albany, NY), May 22, 1999 at A6

“We strongly object to Jane Bryant Quinn’s assertion in a recent column that only `unscrupulous sellers’ of tax-deferred annuities offer them for inclusion in qualified retirement plans. . . . In fact, there is no fee for the tax deferral feature. . . . In or out of a qualified retirement plan, annuities offer features and flexibility that no other financial product can.”

 

The author is President of the American Council of Life Insurance, Washington, DC.

 

40

Virginia B. Morris, Creating Retirement Income (Lightbulb Press 1998)

This 153 page book states that it was “written in collaboration with the National Association for Variable Annuities” and seeks to explain the “valuable role annuities can play in helping you achieve your retirement goals.” The colorful, glossy book repeatedly promotes the use of deferred annuities for funding qualified plans based on the insurance features of the contract, “which many people think are valuable.” 

 

39

Steven A. Haxton, “Design Group Annuities For Changing Needs,” National Underwriter, Life & Health/Financial Services Edition, September 28, 1998 at 14

“Since retirement plan sponsors are obligated by law to design plans that are suitable to their participants from a fiduciary perspective, they must be cautious not to overwhelm participants with unneeded options and their related fees.”

 

“For group annuities, there is typically a charge on assets, which is most commonly associated with the record-keeping and administrative expenses of the plan.”

 

The author is head of sales at Aetna Retirement Services, Hartford, CT.

 

38

Danny Fisher, “Why Put IRA Money Into A Fixed Annuity?,” National Underwriter, Life & Health/Financial Services Edition, September 28, 1998 at 12

“If a bank, savings and loan, or credit union is paying a higher interest rate, you should put your money there.  But, if a fixed annuity contract is paying a higher rate, you should put your money in one of those.  It boils down to a simple comparison of rate to rate.”

 

Danny Fisher, CLU, CHFC, is publisher of Fisher Annuity Index, which tracks fixed annuity crediting rate trends.

 

37

Michael P. Nelan, “Productive Uses For Variable Annuities,” Broker World, September 1998 at 28

Annuities make sense in IRAs, according to the author, because some annuities offer conveniences that some mutual fund companies do not offer, such as automatic asset rebalancing.

 

The author is director of sales for ORBA Financial Management Company.

 

36

Humberto Cruz, “Commissions Can Influence What You’re Offered,” Sun-Sentinel (Ft. Lauderdale, FL), August 1, 1998 at 17A

On a message board used by stockbrokers, one user asked “'Can anyone give me a good reason why a person would invest in a variable annuity in an IRA account?' The answer, by a former insurance agent: '`The first reason is commissions . . .'’ Annuities, one of the most popular investment products of the 1990s, are a prime example of hidden commissions and fees.” 

35

Peter J. Vogt, “The Latest View From The 401(k) Market: Our World Is Turning Upside Down," National Underwriter, Life & Health/Financial Services Edition, July 20, 1998 at 51

The author is an assistant vice president at Hartford Life Insurance Company.

 

For 401(k) plans, “[t]he real value behind what insurers provide are products. Those products are group annuities[.]

 

“Although some may criticize annuity fees as excessive, this argument sounds hollow when the true costs are measured against the quality of service and scope of benefits available through such 401(k) plans.”

 

The author describes the “value” of the insurance fees is the investment education for participants that the insurer provides, as well as the insurer’s helpful customer service centers.

 

34

“Funds Hope Death Benefits Will Earn Salute: Annuity Slip Feared, So American Skandia, SunAmerica Innovate,” InvestmentNews, March 23, 1998

SunAmerica and America Skandia announce a death benefit product for mutual funds, which offers a tax-free death benefit for a 20 bp annual charge.  Variable annuities offer a death benefit that heirs must pay taxes on, for a much higher charge.  Will people still buy variable annuities?

 

“SunAmerica and Skandia executives dismiss the cannibalization threat. They say annuity owners buy the product more for the tax advantages than for the death benefit.”

 

 

33

Dominic J. Vricilla, “Variable Annuities: Dead or Alive?,” Life Insurance Selling, March 1998 at 188.

“The first question the agent should ask the prospect is, `Are you maxing out your Section 401(k) plan or individual retirement account (IRA)?’ The agent should keep in mind that VAs do not offer an advantage over these kinds of accounts. . . . Only after these accounts are funded do investments in the annuity make sense for retirement planning. . . .The [annuity]’s real value will be the tax deferral it offers. . . . [T]here never should be a time when we don’t `do the right thing’ for [the client]. If we don’t try to force square pegs into round holes, we all will have wonderful and profitable relationships with our clients.”

 

 

Dominic J. Vricella, CFP, owns and operates the Professional Consulting Group, LLC, in Marlton, NJ.

 

32

Valerie Morris, “Interview with Lon Smith,” CNNfn Television, February 9, 1998 at 5:52 pm

Lon Smith, president and CEO of Hartford Life, one of the largest sellers in the nation of deferred variable annuities for funding qualified plans, is asked: “Many financial planners who say, annuities, that's not really the way to go because, for one, they're extremely expensive. How would you respond?”

 

Mr. Smith responds: “You should not buy an annuity, generally speaking, unless you have filled up your 401k, unless you have taken advantage of other things. But at that point it becomes a very important product.”

 

 

31

Ron Panko, “Qualifying for Retirement,” and “Four Companies, Four Strategies” Best’s Review, Life/ Health Insurance Edition, February 1998 at 35

“To many customers, mortality and expense charges may appear redundant within qualified plans.” But Hartis Chorney, national insurance director for KPMG Peat Marwick, has some advice for sales representatives trying to overcome these objections. He says that “one of the ways you begin to sell this product” is to hype the annuitization option. “You can ask, `You’ve worked all these years; how do you want to protect what you’ve earned?’ . . . They should play that up for the consumer, the importance of annuitizing an annuity.” 

 

Meanwhile, Dan Schreiber, vice president of pension marketing, CUNA Mutual Life Insurance Company, acknowledges that anyone can annuitize any investment whenever they want: “Anybody can annuitize any 401(k) program, Schreiber said, by rolling over the plan’s assets into an IRA and then annuitizing with an insurance company. `It’s available to anyone whether they’re in annuities now or not.’”

 

30

David Shapiro and Thomas F. Streiff, Annuities (Dearborn R&R Newkirk, 2d ed. 1997) at 100, 129

Annuities “can serve as excellent funding vehicles” for qualified plans, due to their “safety, yield and asset value protection.”

 

“Because tax deferral is free, one need only consider other features, benefits and performance to determine if qualified monies fit in the annuity. You’ll find that they often do and are so used about 50 percent of the time.”

 

29

National Association for Variable Annuities, “Why Use A Variable Annuity To Fund A Qualified Plan?” (1997)

This 4-page consumer brochure argues that “millions of Americans have wisely chosen to invest their qualified plan savings in variable annuities. Shouldn’t you be one of them?” The benefits of variable annuities are described to be the annuitization option and the death benefit.

28

Gary H. Snouffer, The Sales & Marketing Guide to Variable Annuities (The National Underwriter Co. 1997)

In this 198-page book, the author’s number one variable annuity sales idea is to sell variable annuities to fund IRAs, given the popularity of IRAs. (pp. 51-57). He also recommends selling variable annuities as the funding vehicles for 401(k) and other qualified plans. (pp. 156-64).

 

“Earnings on the variable annuity inside the IRA accumulate with a deferral of income tax generally until the values are taken out. Of course, values in variable annuities, which are not in IRAs, also accumulate on a tax deferred basis.” (p. 159).

 

27

Stephen Blakely, “Are Variable Annuities For You?,” Nation’s Business, December 1997 at 20

The article discusses the advantages and disadvantages of using an annuity in a tax qualified plan. The only advantages cited were the insurance features and the guaranteed fixed rate subaccount. The article notes that GICs perform the same investment function as fixed rate subaccounts inside an annuity.

 

The treasurer and co-owner of a company that uses a group annuity in its 401(k) says that "All of my employees who are eligible are participating and contributing to the plan," and `"[j]udging from that, I think they're pretty happy with it." However, the employer does not say that his employees were ever apprised of the extra layer of annuity fees that are being deducted from their accounts, or that he offered his employees the choice of any other investment option for their 401(k) dollars.

 

26

“Why Variable Annuities In A Tax Qualified Plan?,” New York Life Insurance Company document, December 1997

In December 1997, New York Life Insurance Company posted on their Internet site a defensive article about qualified variable annuities. The article claims that variable annuities make sense in a qualified plan because they have a fixed account investment option and a guaranteed death benefit, both of which are of value to “prudent individuals.”

 

A more recent revision describes the limited fund selection (“flexibility”) and surrender fees (“liquidity”) of variable annuities as “benefits.”

 

 

 

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

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