Fading pensions send more to annuities

Others worry that a shift toward annuities could leave many buyers vulnerable to an industry they view as poorly regulated and prone to using misleading practices to sell costly, complicated products.

Last year, Georgians paid $5.2 billion for annuities, up 10 percent from 2013, according to state regulators. Nationally, annuity sales have risen 7 percent since 2012 to $236 billion last year, according to LIMRA, an industry trade group.

That growth could speed up in the wake of new IRS and federal Labor Department rules aimed at getting more people to buy annuities.

The rule changes allow employers to include deferred annuities in 401(k) retirement savings plans — sometimes as part of so-called “target date” funds. Those funds, which are based on an employees’ expected number of years until retirement, are often automatically chosen for employees unless they pick an alternative.

Such annuities begin paying a monthly income after their buyers have retired as a form of insurance against running out of money. Exactly when the payments start is set in a contract.

“By encouraging the use of income annuities (the changes) can help retirees protect themselves from outliving their savings,” J. Mark Ivry, a senior advisor on retirement issues to the federal Treasury Department, said when the new policy was announced last fall.

A number of academic studies have shown that insurance against running out of money is valuable, said Daniel Bauer, an insurance and risk management professor at Georgia State University’s business school.

“People are not aware of how fast life expectancy is rising,” said Bauer. He said some studies show that average life expectancy is rising by roughly three months every year.

“That’s stunning, right? The risk of (retirees) living very long and outliving their funds is very high,” he said.

Brian Horn, a financial advisor at Somerset Wealth Strategies in Portland, Ore., said there’s growing demand for annuities from Baby Boomers who have grown tired of seeing the value of their life savings rise and fall during stock market surges and crashes over the past three decades.

“They’re older. They have less time to recover from another big decline,” he said.

One of Horn’s clients, Ken Warchalowsky, 63, said he’s glad he put most of his money into annuities when he retired nine years ago and moved from New Jersey to Skidaway Island on the Georgia coast.

“So far, it’s been a very good thing,” said Warchalowsky, a former maintenance manager for Verizon. He said he and his wife spent months doing research before buying several variable annuities whose values are tied to a securities market index but also have a guaranteed minimum return.

The guarantees cost extra, Warchalowsky said, but “they guarantee they’ll pay six percent for the rest of my life. It’s a good feeling.”

He now works part-time as a painter and handyman and his wife, a nurse, works part-time at a hospital to supplement their annuity income until he begins claiming his Social Security benefits in a few years.

Lightly regulated

Critics say annuity buyers should beware.

“My personal opinion is I would never buy an annuity,” said Tim Ryles, Georgia’s insurance commissioner from 1991 to 1995. He says many state insurance regulators, including Georgia’s, have fallen short on protecting consumers.

Unlike the stock markets, mutual funds and other investments that are regulated by the U.S. Securities and Exchange Commission, state agencies oversee most types of annuities and the insurance companies and agents who sell them.

“The basic philosophy (of regulators) seems to be ‘let the market take care of regulation,’ ” said Ryles, often now an expert witness in lawsuits against insurance companies.

Under state regulations, he and other critics say, annuity sales agents don’t have to disclose to clients the up-front commissions they’re paid, which are as high as 10 percent. Unscrupulous agents, they say, have duped elderly retirees into buying deferred annuities that weren’t suitable because the contracts don’t begin paying out for years or decades. Many annuities also require buyers to pay hefty “surrender” fees if they need to cash out early.

Georgia’s Office of Insurance and Safety Fire Commissioner, which oversees the annuity market in Georgia, didn’t make officials available for public comments. Since the beginning of 2013, the agency said, it has received about 50 consumer complaints related to annuities — a small number compared to complaints about health insurance plans and other insurance products.

The agency has about two dozen employees who, as part of their overall duties, oversee more than 200 insurance companies and 40,376 agents licensed to sell annuities in Georgia. The agency said it has adopted rules requiring agents to be adequately trained and to ensure that the annuities they sell are suitable for client needs.

But the Georgia agency also said none of the complaints it has received have resulted in any companies or agents being penalized or fined for annuity-related infractions in the past five years.

Hard to figure out

For now, annuities remain a distant runner up behind the $18 trillion market for 401(k) plans, mutual funds and similar investments, which are federally regulated and easier for most to understand.

A study released last month by Boston College’s Center for Retirement Research said annuities can be a sensible choice, especially for people who don’t have traditional pensions. But the researchers concluded that annuities are unpopular in the United States because most people don’t understand them and can’t figure out if they’re a good deal.

At its simplest, a couple near retirement might fork over $100,000 for a “fixed” annuity that immediately pays a fixed monthly amount for life — typically $375 a month at current rates. If both die before they recoup their initial investment, too bad. Heirs get nothing back.

But annuities rapidly get more complex — and costly — as companies offer additional features to compensate for such risks by promising to pay out in case of an early death, for instance.

Another version, variable annuities, were tied to stock market or other indexes, but earned barbs from critics who said they were costly and performed poorly compared to mutual funds.

Compared to mutual funds, “these things aren’t cheap” said Bauer, with GSU. But that, he said, is because they’re offering valuable insurance against running out of money due to a long life or a stock market crash.

“They aren’t cheap because they have very significant risks embedded in them,” he said. The insurance companies assume that risk, he added. “It doesn’t go away.”