Retirees, Beware The Variable Annuity 2.0

What does the financial services industry do when sales of an old product fall flat? It rolls out a new version of the product, hoping clients forget the perils of the past. Stripped of benefits, the new VAs are called “investment-only VAs” or “investment-focused VAs.”

InvestmentNews noted this month, “A new hierarchy is emerging on the variable annuities scene, as some of the largest sellers announce that their first quarter sales are down or flat.” Sales are down across the board, according to reporter Darla Mercado.

“Prudential Financial Inc., which had once spent a few years as the number one seller of VAs, reported that its sales in the first quarter hit $2.3 billion, down 45% from the previous year,” Mercado wrote. Likewise sales of VAs were also down 54% for MetLife Inc. “Fellow annuity juggernaut Lincoln Financial Group reported flat variable annuity sales of $2.9 billion,” Mercado reported.

Mercado noted in a separate story this week, “As InvestmentNews has reported over the last two years, the VA industry is at a crossroads. Many carriers who were previously big sellers of annuities with living benefits have sought to moderate their volumes, as VAs not only expose them to equity market risk but their living benefits are sensitive to low interest rates.”

“Enter the latest product innovations over the last couple of years: Investment-focused variable annuities that are free of living benefits and hybrid annuities that use structured products to protect principal,” she wrote. “The latter product also tends to come without living benefits.”

These complex and opaque financial products sound enticing—a fixed income stream, a life insurance policy, all wrapped around equity mutual funds in “sub-accounts” which provide the upside of a rising equities market.

Unfortunately, when the equity markets dip, so does the investor’s annuity value. Furthermore, many investors buying an annuity don’t need the costly life insurance. And then there are the fees—broker’s commissions are typically 6 % or more.

Moreover, advisors should not recommend that retirees put tax-deferred annuities into already tax-deferred retirement plans. In fact, the SEC cautions, “If you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity.”

The investment-focused annuities may have been appropriate for “high-net-worth” investors who expected to pay large tax bills in 2014. But for most Mom and Pop retirees, the VA 2.0 remains a deal that sounds too good to be true. They are long-term contracts that tie up cash for years with severe penalties for early withdrawal. Regardless of the newest bells and whistles, variable annuities are simply not the right place to invest the irreplaceable money from a lifetime of savings.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.

About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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