Some financial planners can't say a good thing about annuities. They prefer to use mutual funds to form the basis of a financial plan. And an annuity, whether variable or fixed, would be close to the bottom of their recommended investment list.

However, exposure to the concept of annuitization may lead advisers to change their minds.

Advisers will say that many of their clients just don't need an annuity's guaranteed income stream. June Redick, chairman of Retirement Rollovers in Upland, Calif., told a session of the National Association for Variable Annuities marketing conference last month that the company uses annuitization approximately 2% of the time.

Retirement Rollovers specializes in investment advice for recent retirees or new employees with substantial 401(k) accounts. Redick is an advisory affiliate of Los Angeles-based Associated Securities Corp.

Never Touch the Principal

About 80% of Redick's clients have been retired for five years. "They haven't and probably will never need to touch their principal," Redick said. Of the rest, half are still working but are changing jobs and half are more than five years from retirement.

Redick's investment choices for clients include "everything from CDs to variable annuities, stocks, bonds and mutual funds," she said. Advisers consider whether an investment offers flexibility for meeting emergencies, taking advantage of product innovations and responding to the client's changing needs.

In those rare cases where Redick recommends annuitization, it is usually for clients who have a fixed annuity with a low return. Putting the client in a short-term annuity--five years, for example--allows time to make decisions about where the money can go for the long term, she said.

Among the reasons Redick does not annuitize are that clients have defined-benefit plans or Social Security and that an annuity wouldn't offer the best yield or sufficient flexibility. In a fixed annuity where the yield declines after the first year, "We consider the assets are not performing for the client," Redick said.

An Annuity They Were Happy With

Another issue is that clients and those who influence them don't know enough about annuitization, or they may have had a less-than-positive personal experience with annuities. "Maybe parents or a friend had an annuity they weren't happy with," Redick said. She suggested that NAVA develop and sponsor continuing education programs targeting financial advisers, as well as attorneys, CPAs and tax professionals.

Presenting the "Counterpoint" to Redick's "point" about annuitization was William Boscow, SVP and chief marketing officer of Lincoln National Life Insurance Co., headquartered in Fort Wayne, Ind. Looking at the largest potential market for annuities, Boscow said that the baby boom generation's chief concerns are outliving their money and having to pay for catastrophic health/medical expenses, such as nursing homes, according to a 1999 survey. Although an annuity would assuage the first concern, Boscow recognized that both advisers and consumers often do not see its value.

One reason that an annuity is tough to sell is the lack of a good hypothetical engine for annuitization, Boscow said, a program that would show the advantages of annuitizing given various rates of return, life span of the annuitant and withdrawal rates. Boscow showed projections by Ibbotson Associates, using both mutual funds and an immediate variable annuity, to indicate that consumers are likely to outlive their money if they rely on systematic withdrawals from a mutual fund. In the examples, $1 million was invested at a 10% return in a 3.5% inflation environment and withdrawals of $65,000 were made annually.

Boscow then demonstrated a Web-based program developed for the Income4Life annuity, which gives regular income with the option of withdrawals. Though the annuitant did not outlive his money, Boscow thought he hadn't succeeded in convincing Redick that she could offer annuitization to her clients as an investment alternative. "We have yet to simplify the story to the point were we can convince June to have the confidence level, after hearing it once or twice, to tell the story to a client," he said.

However, when Redick was asked what she thought about annuitization at that point, it seemed like Boscow had been more persuasive than he thought. "I'm more inclined today than yesterday to begin looking at it," she said. "I really need to learn about the product." Redick also recognized that her change of mind came after she participated in two hour-long presentations over two days. "It's taken a lot of time--my time, Bill's time--and we're all busy people," she said.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.