Equity‐Indexed Annuities: A Costly Way to Limit Your Lossesi Strong recent results mask plenty of pitfalls.
By Scott Woolley
June 05, 2009
Forbes.com
NAFA, the National Association for Fixed Annuities, is an educational trade association incorporated to
promote the awareness and understanding of fixed annuities. The common media malady is that fixed
annuities – regardless of the interest crediting formula – are investment products. Fixed annuities are
no more purchased as investments than are life or long term care insurance ‐ nor should they be. All of
these products are purchased to protect and preserve assets. Fixed indexed annuities offer guaranteed
death benefits, minimum interest and income you cannot outlive. Fixed indexed annuities can also
provide additional interest over and above the guarantees when the index performance allows.
The headline demonstrates a complete misunderstanding of these products. They do not “limit your
losses” from stock market declines they ELIMINATE the possibility that any of your premium or earned
interest will be lost. While the list of errors, omissions and half‐statements in this article is very lengthy
indeed, we will limit our corrections to the most egregious ones. Helping Americans to better
understand fixed index annuities will encourage them to learn more about a product that has saved
millions of dollars of retirement savings from equity losses.
1. A major error in the article is the assertion that fixed indexed annuities are offered by Prudential
and Met Life. Neither company offers a fixed indexed annuity. Prudential offers only one choice
of a fixed deferred annuity product and Met Life offers two (single and flexible premium)
product choices and none of these deferred annuities credit interest based on the performance
of an index. MassMutual's product is a single premium variable annuity where the purchase
payment is allocated between a fixed account and an equity indexed subaccount like the S&P
500. Genworth exited the indexed annuity marketplace in October 2008. It is curious that you
did not choose to inform your readers with company names and website links to the real “major
companies” that offer indexed annuities. Just about 15 minutes of research would have
informed you that the four companies you named are not fixed indexed annuity carriers.
2. The article itself contradicts FINRA’s statement about fixed indexed annuities that “one of the
most confusing features is the method used to calculate the gain.” The article easily explains
the feature using a mere 45 words.
3. The bias of the article is transparent when the only “regulatory authorities” referenced are the
two that are seeking to claim jurisdiction over a product they actually do not understand. While
NAFA certainly has views that differ from those quoted, an effort at objectivity should have
referenced our White Paper on Indexed Annuity Productsii, so that readers could draw their own
conclusions. Also, IMSAiii and the NAICiv also provide good information for consumers on their
respective websites.
4. It is good that you acknowledge that fixed indexed annuities show strong results, but why do
you limit it to recent history? Perhaps because during the recent economic crisis, while millions
of Americans have seen their 401(k) and retirements savings slashed in half, owners of fixed
indexed annuities have not lost one penny of their account value? But it is also true that the
tradeoff for this protection has also rewarded them with very respectable interest earnings.
Below is NAFA’s report by Miguel A. Herce, Ph.D of CRA International, Inc. showing the
annualized return over 10‐year periods. Many American’s might disagree that 6.5% is a “costly
way to limit losses.”
Period S&P 500 with no Dividends Monthly Averaging Index
(0% floor)
JAN 1975 – OCT 2004 11.6% 7.7%
JAN 1975 – OCT 2008 10.8% 7.5%
JAN 1926 – OCT 2008 7.6% 7.0%
JAN1995 – OCT 2008 6.1% 6.5%
If you are reluctant to take our word for it, perhaps you will trust the excerpt from a fellow journalist,
Steven Hartv, who writes:
If you are generally concerned with potential downswings in the market, then an index annuity
can be a great choice for your investing needs. You can participate in the potential of a strong
market run without having to deal with severe loss during a sharp market downturn. In addition,
the overall principal is safely protected so that no loss will occur. The setup of the index annuity
to give a profit at a minimum rate of return, however, ensures that the investor still sees a profit
(however small) during the lean times of the index. In other words, the index annuity seems to
provide the chance to have your cake and eat it too with a low‐risk financial product that you
can benefit from over time.
i http://resources.nafa.com/files/2009/06‐jun/6‐9‐forbesresponse.pdf
ii http://www.nafa.us/local_links.php?action=jump&catid=7&id=105
iii http://www.nafa.us/local_links.php?action=jump&catid=7&id=106
iv http://resources.nafa.com/files/2009/06‐jun/6‐9‐naicbuyersguidetoannuities.pdf
v http://www.affsphere.com/Money‐and‐Finance/Annuities/What‐is‐an‐Index‐Annuity‐1.html
By Scott Woolley
June 05, 2009
Forbes.com
NAFA, the National Association for Fixed Annuities, is an educational trade association incorporated to
promote the awareness and understanding of fixed annuities. The common media malady is that fixed
annuities – regardless of the interest crediting formula – are investment products. Fixed annuities are
no more purchased as investments than are life or long term care insurance ‐ nor should they be. All of
these products are purchased to protect and preserve assets. Fixed indexed annuities offer guaranteed
death benefits, minimum interest and income you cannot outlive. Fixed indexed annuities can also
provide additional interest over and above the guarantees when the index performance allows.
The headline demonstrates a complete misunderstanding of these products. They do not “limit your
losses” from stock market declines they ELIMINATE the possibility that any of your premium or earned
interest will be lost. While the list of errors, omissions and half‐statements in this article is very lengthy
indeed, we will limit our corrections to the most egregious ones. Helping Americans to better
understand fixed index annuities will encourage them to learn more about a product that has saved
millions of dollars of retirement savings from equity losses.
1. A major error in the article is the assertion that fixed indexed annuities are offered by Prudential
and Met Life. Neither company offers a fixed indexed annuity. Prudential offers only one choice
of a fixed deferred annuity product and Met Life offers two (single and flexible premium)
product choices and none of these deferred annuities credit interest based on the performance
of an index. MassMutual's product is a single premium variable annuity where the purchase
payment is allocated between a fixed account and an equity indexed subaccount like the S&P
500. Genworth exited the indexed annuity marketplace in October 2008. It is curious that you
did not choose to inform your readers with company names and website links to the real “major
companies” that offer indexed annuities. Just about 15 minutes of research would have
informed you that the four companies you named are not fixed indexed annuity carriers.
2. The article itself contradicts FINRA’s statement about fixed indexed annuities that “one of the
most confusing features is the method used to calculate the gain.” The article easily explains
the feature using a mere 45 words.
3. The bias of the article is transparent when the only “regulatory authorities” referenced are the
two that are seeking to claim jurisdiction over a product they actually do not understand. While
NAFA certainly has views that differ from those quoted, an effort at objectivity should have
referenced our White Paper on Indexed Annuity Productsii, so that readers could draw their own
conclusions. Also, IMSAiii and the NAICiv also provide good information for consumers on their
respective websites.
4. It is good that you acknowledge that fixed indexed annuities show strong results, but why do
you limit it to recent history? Perhaps because during the recent economic crisis, while millions
of Americans have seen their 401(k) and retirements savings slashed in half, owners of fixed
indexed annuities have not lost one penny of their account value? But it is also true that the
tradeoff for this protection has also rewarded them with very respectable interest earnings.
Below is NAFA’s report by Miguel A. Herce, Ph.D of CRA International, Inc. showing the
annualized return over 10‐year periods. Many American’s might disagree that 6.5% is a “costly
way to limit losses.”
Period S&P 500 with no Dividends Monthly Averaging Index
(0% floor)
JAN 1975 – OCT 2004 11.6% 7.7%
JAN 1975 – OCT 2008 10.8% 7.5%
JAN 1926 – OCT 2008 7.6% 7.0%
JAN1995 – OCT 2008 6.1% 6.5%
If you are reluctant to take our word for it, perhaps you will trust the excerpt from a fellow journalist,
Steven Hartv, who writes:
If you are generally concerned with potential downswings in the market, then an index annuity
can be a great choice for your investing needs. You can participate in the potential of a strong
market run without having to deal with severe loss during a sharp market downturn. In addition,
the overall principal is safely protected so that no loss will occur. The setup of the index annuity
to give a profit at a minimum rate of return, however, ensures that the investor still sees a profit
(however small) during the lean times of the index. In other words, the index annuity seems to
provide the chance to have your cake and eat it too with a low‐risk financial product that you
can benefit from over time.
i http://resources.nafa.com/files/2009/06‐jun/6‐9‐forbesresponse.pdf
ii http://www.nafa.us/local_links.php?action=jump&catid=7&id=105
iii http://www.nafa.us/local_links.php?action=jump&catid=7&id=106
iv http://resources.nafa.com/files/2009/06‐jun/6‐9‐naicbuyersguidetoannuities.pdf
v http://www.affsphere.com/Money‐and‐Finance/Annuities/What‐is‐an‐Index‐Annuity‐1.html
