Annuity FYI Visitor Blog

According to the Hartford Business Journal, the Massachusetts Mutual Life Insurance Company (MassMutual) is one of the firms most hurt by the Bernie Madoff investment scam. Its Tremont Group Holdings subsidiary invested about $3.3 billion with Madoff, which is most likely lost. 

Ruthie Ackerman at Forbes says that the Rye Investment Management division of Tremont invested virtually all of its clients’ money into Madoff’s Ponzi scheme. Rye was responsible for half of Tremont’s investments. Unfortunately, many investors may have lost their retirement savings as a result.

Despite Tremont being worth $250 million on MassMutual’s books, their representatives are attempting to reassure customers that their accounts have “very little exposure” to the Madoff fraud, and that their financial position will not be greatly affected. That, however, is based only on the parent company’s relatively minor ($10 million) investments with Madoff and not from investors with the Rye unit.

In a 4-1 vote on December 17th, the U.S. Security and Exchange Commission decided to expand their definition of securities to include annuity contracts and optional annuity contracts, affecting indexed annuities issued on or after January 12th, 2011. Reuters’ Rachelle Younglai explains that the ruling gives the SEC the right to regulate equity-indexed annuities, which are a hybrid of securities and insurance that offer both a guaranteed minimum return and a return linked to an equity market. Equity-indexed annuities are riskier than risked annuities but also offer a higher upside. 

Christopher Cox, Chairman of the SEC, has been criticized for lax policing of the $120 billion (and rapidly expanding) industry, especially since it has been accused of marketing equity-indexed annuity products to senior citizens that wouldn’t benefit from their decades-long accumulation periods in their retirement. According to Rachelle, the ruling means that these annuities will now be regulated under the Securities Act and can’t be sold to inappropriate. Insurance agents and some conservative lawmakers oppose the ruling because they believe it will increase costs and decrease choices for consumers.

Due to the increased costs of hedging risk during a market downturn, Pacific Life has increased the fee of a popular annuity product.  A new article from Janet Paskin of Smart Money says that the Foundations 10 variable annuity, which had guaranteed an annual return of 10% for 10 years, is increasing its fee to 1.35% from 0.85%. This fee is the percentage of the original purchase price that covers the guarantee. 

Fortunately for current policyholders, the higher rate won’t affect them until their accounts “step-up” (when the purchase price is reset to reflect gains in the market) and recover from their losses. New policyholders will have to buy at the higher fee percentage, which further pushes up the cost of variable annuities. It’s a good idea to compare annuity rates, no matter what type of annuity you’re buying.

A recent feature by Anne Tergesen in the Wall Street Journal showcases several proposals for the future of 401(k) retirement plans. Originally intended as a supplement to pension plans, a 401(k) plan now tends to serve as the main source of retirement income for most people. Unfortunately, those people with the bad fortune to retire in a slumping stock market (like the current situation) are in danger of retiring in poverty.

Brookings Institution senior fellows Mark Iwry, Lina Walker, and William Gale, with the Heritage Foundation’s David John suggest a greater role for annuities in 401(k) retirement plans. To promote the increased utilization of annuity products, they propose an opportunity to “test drive” an annuity, where employers would automatically convert part of their retirement account balance into an annuity for two years after they retire, unless the employee opts out. Employees will then have another opportunity to opt out of the annuity after the trial period ends, or keep the annuity for life.

Although an annuity would convert a lump sum into a stream of income that would provide some level of stability for retired seniors, annuities don’t appear to be very popular with consumers. In Tergesen’s article, she claims that only 3% of individuals whose 401(k) plans offer them choose to take an annuity option. A preview of sorts, such as the one described above, could improve the reputation of annuities and open more consumers to their benefits.

According to The Retirement Reporter, Securian Financial Group has begun to offer its inagural single premium immediate annuity (SPIA). The product is called IncomeToday! After paying an initial $25,000 premium, IncomeToday! provides continuous fixed payments, either for life or a defined period of time. This SPIA is available from Securian’s Minnesota Life subsidiary for individuals 90 years old or under.

Immediate annuities are pension-like plans that provide greater security than other annuities and may be suitable for retirement, especially for those individuals whose employers no longer provide fixed pensions that guarantee income for life. Securian’s Director of Annuity Marketing, Kerry Geurkink, states that SPIAs could be even more beneficial for women, due to their longer life expectancies. These annuities also stretch tax liabilities over a longer time frame (allowing you to pay less per year).

In the past, Securian has offered a single premium immediate variable annuity (SPIVA).