Annuity IQ

On October 3rd Fidelity announced it is offering immediate annuities in conjunction with their 401 (k) programs. They have already signed up a couple of companies to offer this to their employees about to retire. Is this an about face from the no-load companies view on annuities?

We would have to say no. Fidelity, T. Rowe Price and Vanguard have long since offered annuity products, but it was not until recently that they started pushing them, hard. We will not and cannot take anything away from these companies as far as mutual fund offerings. They all offer some spectacular mutual funds, but when it comes to insurance products, specifically, annuities, people should be skeptical.

Why would we say that? Simple, really what options are they really giving you? The only options they are giving you are their own where they will, obviously, make money on them. This would or could translate into a not so good deal for the consumer. It is our opinion that their variable annuity products are below average in all aspects except for cost. We do not know enough about their immediate annuities to make a judgment on them.

Fidelity is trying and probably will capitalize on this new immediate annuity option they are offering. They are offering two companies to choose from, John Hancock and The Principal. These two companies offer fine products and they are probably going to be good, but who gets paid the commissions on these products?

All immediate annuities pay a commission, ranging from 1% to 5% on the dollars invested. Traditionally when an advisor sells the immediate annuity he or she will collect the commission, so when a company is selling you the product who is going to get paid? We are unsure as that was not discussed, but we assume if these products pay a commission either Fidelity or a Fidelity advisor will be compensated. That in itself is no big deal, but it has us a little concerned.

Our first concern is the limited offerings by Fidelity and the potential to make a fortune off of selling these immediate annuities. Even though Hancock and The Principal have solid products, they may not be the best in the market place. Our second concern is the consumer, are they being given other options? Do they know they can shop for immediate annuities?

With 1.3 trillion dollars managed by Fidelity, they are poised to make a killing if they get paid commissions and gather even a small percentage of the money they manage into immediate annuities. This is a big concern because this is a very captive market place that they dominate. Many consumers may be unaware that other options exist besides Fidelity products and will not take the time to shop around. Worse yet, they may not even know they can shop around for other products.

We are also concerned that many investors may not be aware that this immediate annuity decision is final and irrevocable. With such an important decision being made, what is Fidelity doing to make sure the consumer understands the product and the decision that is being made?

What troubles us even further is the fact that they are not offering some type of variable annuity with a living benefit option. Fidelity has always had a close relationship with Nationwide, which had underwritten their Fidelity Advisor variable annuity, so why are they not offering Nationwide’s variable product that offers living benefits?

A variable annuity with a living benefit can accomplish results similar to an immediate annuity, such as a minimum amount of income for-life. They can also provide upside potential if the stock market or sub-accounts perform well. An immediate Annuity does not offer the same potential and is, generally, locked in forever unless you pay more to get some type of COLA benefit.

We see this as a first step to get people to understand annuities better and we will accept this as a first step. We would, however, like to see a bigger step in the near future and to see variable annuities get the recognition they so desperately deserve. We will not hold out breathe though, but we will wait anxiously.