More investors now think VAs are OK – but fees still a drag

Variable annuities, which combine mutual-fund-like investing with income or other guarantees, are as controversial as ever — but investors increasingly are considering purchasing them, financial advisers say. “Every [variable annuity] product has an Achilles' heel,” Bruce Cacho-Negrete, a financial advisor for Raymond James & Associates Inc. at The Starner Group, said during a panel discussion at the InvestmentNews 2011 Retirement Income Summit yesterday. “None of these are perfect, but if you don't want one, you may have to take a pay cut.” The audience of about 250 advisers had a lot to say on the subject, with some sounding skeptical notes, while others saying the market rout of 2008 has changed some investors' minds about the products. One adviser said that about 20% of his clients have asked for information on annuities in the past year or so. Another noted that his annuity clients include the chief risk officer of a big insurer and two certified financial planners. On the negative side, advisers questioned the fees charged for annuities, which include annual charges for administrative and guarantee riders, along with the usual fees charged on sub-accounts. Mr. Cacho-Negrete said he agrees with criticism about the fees but said that there are good deals to be found. “I have seen 15- to 30-basis-point differences on the same subaccount” offered in different products, he said. “Shop carefully.” Guaranteed-minimum-withdrawal benefits, a popular feature of annuities, allow account holders to withdraw 5% or so of their money each year, pegged to the highest value that their accounts reach, even if an account's value later falls. An investor who withdraws 5% of his or her retirement savings each year has a 12% chance of running out of money before he or she dies, according to Monte Carlo investment return simulation programs, said Mark A. Cortazzo, senior partner at Macro Consulting Group, another panelist. “So variable annuities aren't so bad,” compared with the open market, he said. But some deals are better than others, and it pays to shop around, Mr. Cortazzo said. “Every salesman shows the perfect scenario for their product,” which makes it hard to compare different products, Mr. Cacho-Negrete said. One way to triangulate: ask salespeople about the weaknesses of their competitors' products, he said.