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 2

(annuity industry views)

 

 

 

Citation

Summary Excerpt

25

“Life Insurers Advised of Opportunities and Perils,” BestWire, November 18, 1997

Thomas C. Sutton, outgoing ACLI Chairman and chief executive officer of Pacific Life Insurance Co., told an audience at the 1997 annual meeting of the ACLI that the loss of tax advantages for their products would “eliminate” the industry.  “`[U]ltimately, our public image validates our legitimacy as an industry - and validates the special tax advantages, rooted in sound public policy, which our products have historically enjoyed.’”

 

“Sutton said that proposals in Congress for `radical change’ of the tax system concern him most.  `Whether their motivation is to eliminate IRS abuses, or to eliminate tax complexity, or to eliminate tax law driving business decisions, one consequence is completely clear: radical tax change will eliminate us.  The particular form of a new tax scheme - consumption tax, sales tax, flat tax, graduated flat tax -- merely specifies the means of execution.’”

 

 

24

Joanne Morrison, "Mutual Fund Group Wants More Fee Disclosure," Reuters, November 12, 1997

The mutual fund industry, through its trade organization, is attempting to get Congress to close the loophole that allows insurance companies to sell deferred annuities to fund 401(k) plans and not have to disclose the annuity insurance charges to plan participants.  By contrast, mutual funds disclose all fees and charges in materials given to plan participants.

 

Lynn Dudley, of the Association of Private Pension and Welfare Plans, which represents insurers, says that her group is opposed to any disclosure of “service-by-service breakdown of plan expenses.”  According to Ms. Dudley, disclosure to 401(k) plan participants that their investment is really an annuity insurance product with an extra layer of insurance charges would only confuse them.  "The participant will not know, and will not be able to readily ascertain, the fair market value of the services."

 

23

Session 33PD - Are Individual Annuities Profitable,” Society of Actuaries Record, Vol. 23, No. 3 (October 26, 1997) at 7, 8

Paul H. LeFevre, executive vice president, Keyport Life Insurance Company, speaking at an actuaries’ convention, states:  “[T]here is an awareness that a lot of the annuities aren’t being sold correctly. . . . That means somebody is going to discover it, and that means your persistency isn’t going to be what you planned. . . . We’ve got to start aiming this product at the people who need to save for retirement. We need to start targeting the people who will get the full benefit of both the product features and the tax features.”

 

22

Brenda Buttner, "Estate Planning and Mutual Fund Investing," The Money Club, CNBC Television, October 6, 1997 10:41 AM

The program’s guest was Altair Gobo, a certified financial planner with US Financial Services, in Fairfield, New Jersey.

 

He says the variable annuity death benefit is, at least, “a pretty interesting feature to consider anyway when you’re putting your IRA together.” Fixed annuities may be an advisable IRA investment “if the rates are higher than everything else you can get on that level of investment -- meaning, are they higher than Treasuries, are they higher than CDs, etc.?”

 

21

George J. Limbach, “SIMPLE IRAs Offer Good Tradeoff In Benefits,” National Underwriter, Life & Health/Financial Services Edition, June 9, 1997 at 17

The author is vice president-sales support for the Penn Mutual Life Insurance Company. Without directly addressing the merits of qualified annuities, the article encourages agents to sell them for funding the SIMPLE IRA plans of small businesses that object to the cost of setting up a 401(k) plan for their employees.

 

“For the individual agent, the same variable annuity product that is used for non-qualified savings and plan distributions can often be used to fund the SIMPLE IRA. With options like multiple managers, fixed and variable choices, and transfer privileges, this type of program can offer the same quality investments as a more elaborate 401(k) plan.”

 

 

20

Charlotte Coles Goldston, “Park A Variable Annuity In Your IRA Garage And Rev Up Your Savings Potential,” The Nashville Banner, May 13, 1997 at 2D

The author is a partner at J.C. Bradford & Co. She argues that variable annuities are “attractive” for IRA investors because “they are no-load vehicles” and provide protection to beneficiaries if the market drops.

 

The article does not explain how variable annuities are “no load vehicles” or how they “rev up your savings potential” if an extra layer of unnecessary insurance fees are reducing investment returns.

 

19

Ann Anderson, "Variable Annuities Make Sense As IRA Funding Tool," National Underwriter, Life & Health/Financial Services Edition, March 24, 1997 at 16

The author is vice president and associate director of the National Association for Variable Annuities. Ms. Anderson stresses that the insurance features are worth the expense of annuity fees and provide a “real comfort” for conservative investors. "When considering expenses, one must weigh them against all of the benefits and options that these expenses cover. . . . VAs are insurance products specifically designed for retirement and incorporating features designed for this market."

18

Sean G. King, “Letters,” Journal of Accountancy, March 1997

The author is president of Retirement Plan Consultants Inc. in Knoxville, Tennessee.  He objects to the article "Which Assets Don't Belong in an IRA" (JofA, Nov.96), which stated that variable annuities “should always be left outside an IRA,” on the basis that funds used in variable annuities outperform funds not used in variable annuities. The author cites a survey of published fund performance figures.

 

17

Thomas L. West, Jr., “Qualified VAs Can Offer Publicly Traded Funds,” National Underwriter, Life & Health/Financial Services Edition, January 20, 1997 at 16

“Variable annuity customers in this [the qualified] market understand that with the insurance charges, they are buying features and services which include annuitization, asset allocation, Internal Revenue Service audit compliance, on-site and enrollment services, retirement planning, and guaranteed death benefits.”

 

The author is president of the Variable Annuity Life Insurance Company, a Houston subsidiary of American General Company.

16

Grace W. Weinstein, “Does An Annuity Fit Your Investment Plan?,” Investor’s Business Daily, July 1, 1996 at A1

“Financial planners are quick to point out that it makes little sense to put tax-qualified money inside an annuity because qualified plans already are tax-sheltered. But [Scott] Dunn [senior analyst at LIMRA International, a life insurance research group in Hartford, Conn.] points out that many younger people, in their early 50s and below, choose to fund qualified plans through an annuity. `You get the tax shelter no matter how you fund your qualified plan, so there’s no real disadvantage,’ he said. And annuities are attractive because there is a guaranteed death benefit.”

 

15

Session 73L  -- Section 403(b) and 457 Plans,” Society of Actuaries Record, Vol. 22, No.2 (June 26, 1996) at 11

Paul Carlevato, who is the 403(b) plan service center manager for Metropolitan Life Insurance Company, states in response to the question “why aren’t plans designed so that you just have the choice of buying an annuity or not buying an annuity?” that:

 

“I believe that a lot of companies are still relying on the annuity contracts, because that’s what they are comfortable with. They have that hands-on distribution that has always been there and they’re slow to move over. But the mutual fund companies are definitely changing the distribution strategy in the 403(b) market.”

 

Peter A. Gold, national practice director of 403(b) plans for Buck Consultants, Stamford, Connecticut, speaking at the same actuaries’ convention, states:

 

“A related question is why do 403(b) plans exist at all? Why don’t we just . . . do away with 403(b) plans? That would make the most sense. I don’t think that’s ever going to happen, due to the lobbying strength of some of the 403(b) providers who don’t want to face the competition of the mutual funds in their areas. It certainly should happen.”

 

14

Norse N. Blazzard and Judith Hasenauer, "Use Annuities Inside A Pension Plan? You Bet," National Underwriter, Life & Health/Financial Services Edition, June 10, 1996 at 10

The article speaks positively about the income security a retiree can achieve using an immediate annuity in an IRA that is in the payout phase, but does not specifically address the merits of deferred annuities as an IRA funding vehicle.

 

The authors are regulatory attorneys for life insurance companies. Mr. Blazzard is head of the variable life committee of the National Association for Variable Annuities and Ms. Hasenauer co-chairs NAVA's regulatory affairs committee.

 

13

Todd M. Barmash, “Smith Barney Debuts First Group Annuity For Small 401(k) Plan Market,” Fund Marketing Alert, May 20, 1996 at 1

“A group annuity is a variable annuity that’s market to qualified retirement plans, such as 401(k), 403(b) and 457. They appeal to plan sponsors primarily because employers can use the insurance charge to pay for record-keeping and other administrative services. `The plan sponsor wants the participant to pay some of the record-keeping cost,’ says Steve Haxton, Nationwide’s V.P. of sales. Nationwide is the leading provider of group annuities to the small plan market.”

 

12

Marcy L. Supovitz, "Some 'Myths' About Variable Annuities Are 'Slightly Off The Mark,'" National Underwriter, Life & Health/Financial Services Edition, July 24, 1995 at 13

The author is vice president-retirement plans at Pioneer Mutual Funds, Boston. She argues that it is a "myth" that variable annuities do not make sense in tax-deferred retirement plans. In return for insurance expenses, variable annuities "provide several features many investors find appealing, whether the contracts are inside or outside of a qualified plan."

11

David Shapiro and Thomas F. Streiff, “Innovative Annuity Income Options for Retirees,” National Underwriter, Life & Health/Financial Services Edition, June 6, 1994 at 20

The authors note that annuity clients are inclined to visit tax professionals who in turn “usually voices his or her opinion that annuities should not be used to fund qualified plan assets.  Never, they say, put a tax-deferred asset within a qualified plan. This simply illustrates the shortsighted thinking of those who don't understand annuities. Their focus is on tax deferral and not on the other features and benefits found in the annuity contract.”

 

The authors conclude that “the annuity is much more than simply a tax-deferred fixed or variable investment. The benefits of this product absolutely merit consideration for inclusion into qualified plans, IRAs and TSAs.”

 

10

James McHugh, “Realizing Your Potential In The IRA Rollover Market,” NAVA Outlook, January/February 1994

The article describes the “two-step” decision process purchasers undertake in funding IRA rollovers.  Annuities can be sold solely on the strength of the client’s trust in the agent’s expertise with rollovers.  The insurance company can assist the agent become a rollover expert.  “[T]he IRA rollover decision is a two-step process [decide to set up a rollover IRA, then decide on an investment], and clients often need help to come to the right decisions. To meet this need, your marketing staff should consider developing seminar programs and user-friendly materials that your distributors can use either in an organizational setting or one-on-one. Generally speaking, when you are successful in showing clients the wisdom of rolling over their distribution, the probability is very high that those clients will invest their dollars with you.

 

James McHugh is manager of the MetLife Pension and Savings Center.

 

9

Variable Products - The Product for the 1990’s?,” Society of Actuaries Record, Boston Meeting, May 1993 at 1049

 “I’ve had people ask me this question: Why would somebody in a qualified plan buy a shelter within a shelter. . . . The market does show that there’s a huge market for qualified plans out there, and there’s nothing wrong with writing an annuity within a qualified plan.” (John G. Vrysen, chief actuary, North American Security Life, Boston).

 

“I think it’s really an all-in-one package at the smaller size [401(k) plan].” (John M. Fenton, Tillinghast)..

 

“There is a death benefit, a built-in mechanism, that is, the annuity purchase rights to provide an income for life if a person chooses and, last, the management of the assets.” (Robert J. Bethoney, PaineWebber).

.

8

Kay Dempsey, “Annuities Help Diversify Retirement Distributions,” National Underwriter, Life & Health/Financial Services Edition, November 2, 1992 at 10

Ms. Dempsey argues that agents should recommend to their clients that they have “at least 50 percent” of their retirement money “in deferred annuities (not immediate annuities), preferably within the shell of an IRA rollover account.” She justifies her opinion on the basis that “certain insurance carriers guarantee to pay any IRS penalties imposed as a result of a miscalculation of required minimum distributions as to amount and timing. . . . If retirement funds are invested in a mutual fund, or in a bank certificate of deposit, will those providers give the same written guarantee?  Attorneys and certified public accountants appreciate, respect, and will endorse your qualified annuity recommendation for this reason alone.”

 

7

Kay Dempsey, “Annuity Solutions Become The Next 'Big Easy,'” National Underwriter, Life & Health/Financial Services Edition, June 1, 1992 at 18

For agents looking for “a shortcut” to easy sales, Ms. Dempsey states that “the one remaining, often-overlooked, but legitimate, 'Big Easy,' is the bountiful market for annuities as a part of distributions of qualified monies: Individual Retirement Accounts; Simplified Employee Pensions; 401(k)s; money purchase plans; defined-benefit pensions; and Tax-Sheltered Annuities.”

 

Ms. Dempsey is a principal of Atlanta-based Insurance Designers of America, an insurance brokerage firm.

 

6

“Market of the Future,” TRENDLINES, vol. 2, no. 5, June 1992 at 5

“Even under the best conditions, it seems to me that selling an annuity into a 403(b) plan is a suspect strategy.  Why place a tax-deferred vehicle inside a tax-deferred account, and incur all those extra expenses?”

 

The article predicts that journalists will eventually catch on to the annuity abuses occurring in the 403(b) marketplace.  “When that happens, many thousands of schools, hospitals and other non-profits are going to be embarrassed by what they’ve saddled their employees with. . . . Whoever is already recommending mutual funds to 403(b) plans. . . will have more business than he or she can possibly handle.”

 

5

“Answering The Critics: Why Use A Variable Annuity To Fund A Qualified Plan?,” VARDS/FSW National Variable Annuity Almanac, Spring 1992 at 17

Doug Grip, vice president, insurance products, Massachusetts Financial Services, argues that “[u]sing a variable annuity to fund a qualified plan isn’t such a bad idea after all” if you consider the insurance features and the “flexibility” of the product.

 

Meridee Sagadin, director of annuity marketing, Northwestern Mutual Life, argues that the annuity death benefit as a “win-win benefit” because beneficiaries will get either the account balance (that they would have gotten anyway), or, if it is higher, the minimum contract death benefit amount.

 

4

Stephen Piontek, “The Familiar, Eerie Silence of The IRA Season,” National Underwriter, Life & Health/Financial Services Edition, March 21, 1988 at 27

The author, editor of a life insurance industry trade journal, laments that insurers are not more aggressive in openly marketing variable annuities for IRAs. “This would seem like a natural pitch for insurers[.]”

 

Ten years later, on February 2, 1998, a somewhat similar article appears as an unsigned editorial in the same publication. One difference is that the editorial -- “Reams Of Opportunity In Roth IRAs” -- references the mutual fund subsidiaries of life insurers as having the IRA opportunities.

 

3

David A. Pasant, “The Invidious Percentage Snick,” Best’s Review, Life/ Health Insurance Edition, July 1984 at 44

The author responds to critics of deferred annuities inside IRAs who have pointed out that persons who wish to annuitize their IRA money can buy an immediate annuity at the time they wish to begin taking distributions. The article argues that it makes sense to fund IRAs with deferred annuities – even though you will be paying annuity fees “for 30 or 40 years” - because, according to the author, the insurer will offer annuitization rates that are more attractive than that available with an immediate annuity.

 

 

2

Phil Beard, “How To Use Your Annuity Products To Enter The IRA Market,” Reinsurance Reporter, Issue No. 80, Winter 1976

“At the time the IRA became effective January 1, 1975, many [life insurance] companies had reservations as to the impact this market would have on their operations.”

 

“The annuity policy is most compatible with the IRA market and provides the participant with a very practical means of obtaining his goals at retirement[.]”

 

The author is manager, special markets administration, of the equities department at Lincoln National Life.

 

1

“IRAs: A Hot Deal For Some,” Business Week, December 29, 1975 at 112

“Insurance companies see the IRAs as a whole new market for their annuity policies -- either a straight annuity or a combination package that splits the $1,500 a year between life insurance now and an annuity after retirement.  But most major insurance companies charge a front-end commission, which can eat up as much as 40% of the first year's $1,500 and a 6% to 8% annual charge after that.”

 

 

 

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