April 20, 2011

TO: Terry Savage, Chicago Sun-Times

FROM: Kim O’Brien, NAFA Executive Director

RE: Considering an Annuity? There’s always a catch

Dear Ms. Savage,

I think we can agree that every financial product has limitations - which you refer to as a catch – and consumers should understand them and how they may affect their retirement plan.

The catch with CDs and money market funds is that they offer returns that typically fall far short of inflation. That reality is exacerbated by the fact that you must pay taxes on the gains even if you leave the money alone. The catch with stock mutual funds or variable annuities is that they can lose a lot of value quickly from time to time with no guarantee of recovery.

The catch with fixed indexed annuities is that you promise to keep them for the entire surrender period or pay a fee to break that promise. Also, you only receive additional interest when the index you choose is performing positively. When the index performs negatively you must accept zero interest above the minimum guaranteed interest.

However, all of the above financial products are attractive to consumers because they offer certain unique advantages.

The unique advantage of indexed annuities is that they proved to provide much greater upside potential than CDs and money market funds at a similar level of safety and the upside is tax deferred compounding the advantage. The indexed annuity’s safety advantage is that the issuing insurance carrier contractually guarantees that even if the market crashes, the annuity owner will lose not one penny of their original premium or previously credited interest.

With your recommended strategy of a mix of CDs and stock mutual funds, if the market crashes, the owner suffers a loss in the mutual fund portion of their investment. With the fixed indexed annuity, the owner does not. That’s a significant difference in safety!

By the way, your article also expresses an obvious bias against commissions. I see that you are a registered investment advisor. Consider that most fee-based RIAs charge clients a fee of about 1% of assets annually. While that fee may seem minor compared to a 6% - 7% average commission on fixed indexed annuity, remember that an annuity commission is only paid once, not annually. Thus, the reality is that fixed indexed annuity commissions, on a present value basis, are less than the amount that most RIAs charge their clients over time.

NAFA is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities and their benefits in a financial plan by educating regulators, legislators, consumers, members of the media, and industry personnel. NAFA members represent over 115,000 agents and registered representatives selling fixed annuities. NAFA was founded in 1998 and is located in Milwaukee, Wisconsin.

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