The Variable Annuities Landscape Is Changing. Are You Being Shortchanged?

Washington, DCWith the largest single demographic in America slipping into retirement, never has there been a more compelling issue than that of retirement income. And part of that equation for hundreds of thousands of Baby Boomers includes the Variable Annuity. More than a tax-deferred investment account, the product also offers retires a living benefit rider tied to an insurance policy that guaranteed a base income independent of market performance, or even the ultimate survival of the account funds.

However, the bear market and the economic downturn of 2008 hit the providers of these products deeply. Two providers have abandoned the variable annuity market altogether, while many of those who remain are changing the terms in such a way as to limit the liability of the provider. But it’s not necessarily in the best interest of those persons holding Variable Annuities.

What’s more is the relationship of change to the annuity sector - such as increased fees - and Variable Annuity Laws. According to CNN Money (8/6/13), the Securities and Exchange Commission (SEC) is investigating.

While the economic climate over the past five years has prompted providers of Variable Annuities to change the landscape in order to limit their liability, a simple increase in fees can have a significant negative impact on an investor’s portfolio.

According to the example provided by CNN Money, the average fee for the minimum withdrawal benefit was about 0.75 percent in 2009. That same fee averaged 1.25 percent as of this past December. Combined with other fees and costs associated with the Variable Annuity, the total hit can be as much as 3.7 percent overall.

Such a fee increase can severely limit a portfolio’s growth potential, as the report demonstrates. As an example, $100,000 invested in a mutual fund portfolio comprised of 60 percent large-capacity stocks and 40 percent intermediate-term bonds, assuming 0.75 percent in fees, would have grown to around $131,600 in 10 years - even in the kind of bear markets seen after 2008.

However, with fee increases, that same investment in today’s environment would be worth $95,500 - saddling the investor with zero growth and a five percent loss after 10 years.

According to the report, investors with contracts written prior to 2011 would find themselves to be most vulnerable to such term revisions - the provision for which is usually contained in the fine print of a contract provided the insurer duly informs the investor of the changes in a timely manner.

That said, the SEC is looking into it, to see if these changes in terms are legal and properly meet Variable Annuity Laws. Regardless of what the contract says, were you made aware of the potential for these changes?

In some cases, holders of Variable Annuities have been offered an incentive, such as 20 percent of the value of the benefit base, in order to drop the living benefit rider. While the offer may appear tempting on the surface, it is also an obvious sign that the provider is concerned about remaining on the hook for guaranteed income payouts beyond the depletion of the base fund, and wants out. While such an offer can be made, there is no legal requirement to take it.

Financial experts point out that recent changes enacted or attempted by the product providers make the Variable Annuity less attractive - to the point where purchasing one in today’s environment may not make the most sense. However, is it fair for providers of Variable Annuities issued prior to 2011 to seek a change in the terms, simply to limit its risk?

At the end of the day, both parties must abide by the contents of the contract. Any holder of a Variable Annuity who is concerned about overtures by the Annuity provider - including the arbitrary raising of fees and other changes that do not have the best interest of the investor at heart - would be wise to consult a Variable Annuities attorney to ensure Variable Annuity Laws are properly upheld, and that you are not unduly shortchanged in the process.