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PERSONAL FINANCE
Bloomberg Businessweek
May 14, 2018
33
RACHLEFF: COURTESY WEALTHFRONT. ILLUSTRATION BY LIA KANTROWITZ
○ Annuities earned a reputation for high costs and complexity.
But the right kind could help
TheRetirement
Solution FewLove
Saving for retirement is hard enough, but another
diicult challenge is making sure the money lasts.
Invest your nest egg conservatively, and you might
not be able to stretch the money out, especially
if you live longer than you expect. Putting more
in the stock market could keep the pile growing—
but once you stop adding money, a streak of bad
returns could decimate your stake and leave you
little chance to recover.
For years many retirement experts have pointed
to a potential solution: annuities. In its simplest
form, buying an annuity involves taking part of
your savings and handing it over to an insurance
company. The insurer then pays out a guaranteed
income for the rest of your life. In theory, putting
at least part of retirement savings into an annuity
can make sure you always have some income no
matter what the markets do.
Even so, annuities gained a bad reputation in
some circles. Many annuities are really investment
products combined with insurance, with the option
of creating a stream of annuity income as just one
of their features. The commission-based sales
model common in the insurance industry often
meant that agents and inancial advisers had incen-
tives to push higher-cost annuities. Those products
sometimes locked up the money for more than a
decade before an investor could withdraw funds
without paying a hefty penalty. And complex rules
governing how that money was invested—explained
in ilings running 100 pages or more—left many
scratching their heads in confusion.
The insurance industry says it’s gotten the mes-
sage. It was prodded in part by Obama-era rules
from the U.S. Department of Labor that took aim
at conlicts of interest in investment advice. In
2016 and 2017, sales of annuities dropped as advis-
ers faced uncertainty about the impact of the new
regulations. Insurers created products redesigned
to win back advisers and a skeptical public. Many
pay advisers through fees rather than commissions,
sidestepping some conlict of interest worries.
Pathway Financial Advisors, a fee-based irm
with oices in Vermont and Georgia, steered clear
of annuities for years. “Historically, insurance
products have been sold and not bought,” says
founder Scott Beaudin. Last year he added an annu-
ity to a client’s portfolio for the irst time, largely
because the products have become “simpler.”
But the Labor Department’s conlict of inter-
est rules are in trouble. In March a U.S. appeals
court struck them down, saying they were out-
side the department’s authority and “unreason-
able”; the Trump administration hasn’t appealed.
And some think the improvements to annuities
aren’t enough. “From my perspective, there hav-
en’t been any real dramatic changes in product
design,” says Ken Nuss, chief executive oicer of
AnnuityAdvantage, an online marketplace. Andrew
Komarow, co-founder of Talcott Financial Group in
Farmington, Conn., says the main diference is that
the new products are being aggressively marketed
to fee-based advisers.
Retirement funding has become a more press-
ing issue as baby boomers age out of the work-
force. According to data from the Employee Beneit
Research Institute, total individual retirement sav-
ings in the U.S. are more than $4 trillion short of
what’s needed. Boomers are living longer than pre-
vious generations, and many worry they’ll run out
of money. “They start hoarding, and they’re afraid
to spend anything,” says Ted Goldman, senior pen-
sion fellow at the American Academy of Actuaries.
“Annuities and protection products actually
have an opportunity to solve that,” says Jamie Price,
CEO of the Advisor Group, a network of indepen-
dent advisers. “The problem is some of them have
high costs, and I think that they need to rethink
how they build their products and services.”
More investors may one day buy annuities with-
out going through advisers or agents. Under the
Obama administration, regulators made it easier
“Historically,
insurance
productshave
beensoldand
notbought”