NEW YORK — A congressman who raised eyebrows last month when he seemed to imply that annuities are the answer to the need for lifetime retirement income claims he was misunderstood.
“To paraphrase James Carville, it’s the annuities, stupid,” Rep. Earl Pomeroy, D-N.D., said while introducing a study on the “American Dream” which was commissioned by New York-based
MetLife Inc. During his speech at the National Press Club in Washington, he followed that up with, “Nest eggs never fixed anything,” and said that annuities should be favored over defined contribution plans.
“I wasn’t talking about annuity products” but rather about assured streams of income, Mr. Pomeroy said in an interview.
“My comments got taken out of context,” he said. “I’m agnostic about how people get the assured income stream, whether through annuities, pension plans, 401(k) plans,
Social Security or any other method.”
MetLife’s study doesn’t directly mention annuities, though it implies the need for a reliable source of lifetime income. The company offers a variety of fixed and variable annuities.
Mr. Pomeroy noted that among his primary legislative priorities is helping middle-income people save for retirement. He has proposed legislation that would give additional tax advantages to people who set aside money for retirement and to businesses that implement employee savings plans.
“Back in North Dakota, it used to be that people would retire, buy a Winnebago and live comfortably. But now, many are living in self-imposed poverty, with an awful lot of anxiety about outliving their assets and becoming a burden to their children,” Mr. Pomeroy said.
“People need a wake-up call,” said Beth Hirschhorn,
MetLife’s chief marketing officer. “Rep. Pomeroy is an expert on retirement security and very passionate about that issue.”
The congressman spoke unsolicited by
MetLife because of concerns that traditional pension plans and
Social Security won’t be adequate to provide the needed income, Ms. Hirschhorn added.
Not amused
But some think that Mr. Pomeroy, a former North Dakota insurance commissioner and former president of the National Association of Insurance Commissioners in Kansas City, Mo., was off base with his remarks.
A financial adviser could be disciplined by regulators for saying what the congressman said, noted Boyd Page, a senior partner with the securities law firm Page Perry LLC in Atlanta.
“An adviser has an obligation to look at the cost of the annuity and its income guarantees — and at alternative investments — and not automatically recommend an annuity to everyone,” he said.
“Annuities can play a vital role in retirement planning, but they are not for everyone,” said Scott DeMonte, founder of AnnuityIQ .com, part of WealthNet Inc. in Fayetteville, N.Y. “There has to be a suitability determination to see if they are right for the individual.”
But not all agree.
“If advisers can’t say what the congressman is saying, that is because they are being muzzled by the regulatory systems from telling the truth,” said Robert Hanten, president of Solidarity Financial Inc. in Wayzata, Minn.
“Annuities really are the only way to guarantee income throughout retirement,” Ms. Hirschorn said.
“Regarding nest eggs, the congressman was making the point that people don’t know how to live off of a bag of cash. They don’t know how to spend down their savings,” Ms. Hirschorn said.
“There are other ways of guaranteeing income, such as through bonds and other interest-bearing investments,” Mr. Page said. “From doing a lot of investor litigation, I can tell you that annuities are problems for elderly investors because of the tremendous surrender charges.”
Mr. Pomeroy noted that he last served as an insurance commissioner in 1992, before the controversies surrounding allegedly inappropriate annuity sales started. But he is well aware that there have been abuses involving annuities.
Observers also pointed out that the income “guarantee” depends on the continued financial viability of the insurer and its successors if it is sold or merged, or the ability of state guarantee funds to make good on the obligations if the insurer can’t. So it isn’t actually “guaranteed.”
Attention grab necessary
Some in the industry think
that overstatement — whether intentional or unintentional — is necessary to grab public
attention.
“Unless it’s an extreme view that someone can jump on, it never gets noticed or sparks debate,” said Mark Cortazzo, a senior partner at MACRO Consulting Group LLC in Parsippany, N.J.
“Baby boomers have undersaved — they don’t understand market risk and the possibility of running out of money,” he said. “That message should not be watered down,” Mr. Cortazzo added.
If advisers don’t alert clients to the likelihood of running out of money before death at a given withdrawal rate and portfolio design, and don’t show how an annuity can ameliorate that problem, they are withholding material information, Mr. Hanten said.
