USA TODAY: Why I still hate annuities: Here are the reasons these investments are bogus
by Ken Fisher
“I’d die and go to hell before selling an annuity” (to you or anyone).
You may have seen me on my firm’s long-running TV ads saying that. Over the top? Yep!
That bluntness aims to cut through the soft, misleading, and in my opinion, near-criminal “guarantees” annuity firms have peddled for decades – to investors’ detriment. Whatever you think an annuity can do for you, it can’t. Or there is likely a cheaper, better, more flexible way to do it.
Note: I’m not referring to simple immediate “fixed” annuities that convert one lump sum to income. Those can be OK, done right. But deferred annuities – “variables,” “indexed” and “deferred fixed” – are bogus. Here, you upfront cash for a contract that pays later. Meanwhile, your principal contract value supposedly grows.
They’re usually marketed as safe investments, with guaranteed income, when you’re ready. Most buyers never see the truth. It’s buried in huge, complex, jargon-filled contracts that normal folks can’t understand without a dictionary, gallons of coffee and a claimant’s lawyer. Few read them.
Sales reps, (many well-intended), believe in annuities but are paid handsomely to blind-eye reality. Why? A single, big sale can fund a year at Yale for his or her child. Some say, “Yes there are bad ones, but I find the good ones for you.” It’s almost always untrue. The pitfalls are legion.
Consider “variable” annuities, the slow-killer cigarettes of investing. First, fees are nose-bleed-high, almost always, combining upfront and hidden commissions. Firms pitch them as safe, high returns – capital preservation plus growth. Horsepucky!
Variables buy stock and bond funds, fluctuating with volatile markets. Those funds typically charge high fees. Then add insurance fees, contract fees, fees for riders – say, life insurance or fancy income “benefits” offering dubious value. You likely never can figure out the full fees. Typically, they’re America’s most expensive investment products – plus low returns.
It’s absolutely better, long-term, to own low-cost stock and bond funds directly – while building a sensible retirement cash flow plan. It’s loads cheaper, has hugely higher returns and is more flexible. If you need life insurance, just buy an inexpensive term policy (see my March 17 column).
“Indexed” annuities are loosely linked to stock market indexes. Their pitch: Get stocks’ upside without the downside – with little to no fees. But the upside is severely limited. Returns usually omit dividends. Then, most use a “participation rate,” providing just part of the index’s return. If the index rises 10%, your participation rate is 50%, your return is 5%. The insurer keeps the rest.
These often include “performance caps” – maximums you get in any month, quarter or year. Problem: Stock returns bounce big time. Envision a 10-percent annual cap. You miss most of all the bigger up years – which is where most of history’s gains come from. Monthly caps are even deadlier. Again, you miss big “up” months, like recently. Long-term, these annuity returns often look like fat-fee Certificates of Deposit (CDs).
“Deferred fixed” annuities offer steady returns for a set period. But the rate is low, and it can reset at the insurer’s discretion. It becomes like an expensive restricted version of a CD. Ditching a CD is easy. Ditching a fixed annuity usually suffers stiff penalties and, potentially, a tax hit. Whatever you need, annuities are probably wrong.
Yes, my advice is conflicted – my firm often helps people exit deferred annuities. My opinion remains, regardless. All but simple immediate fixed annuities should be outlawed because buyers almost always misunderstand what they’re buying. It’s one step from fraud. Everyone deserves more transparent and flexible investments.
Ken Fisher isfounder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.