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| MONDAY, MAY 28, 2012
Top 50 Annuities
By KAREN HUBE
Americans are eager to lock in steady retirement income.
We pick the best annuities from a dizzying array of choices.
Correction: An earlier version of this story incorrectly stated the number of variable annuity
investment choices available from Lincoln National.
When wealth manager Peter D'Arruda talks about the "old days" for annuities, he isn't talking
about the Roman Empire, where these income-generating insurance products were invented and
payments were calculated with an abacus. He's talking about last year, when guaranteed payouts
and benefits on all kinds of annuities were far more generous. For example, he helped a 45-year-old
investor find a fixed index annuity with guaranteed annual appreciation of 8.2% for 30 years
and no risk to principal.
Today an investor that age likely wouldn't even qualify for an index annuity with income
guarantees. "And that rate? It doesn't exist anymore," says D'Arruda, president of Capital
Financial in Cary, N.C. "A lot has changed. There are still some good products out there, but it's
hard to find the whipped cream on the sundae."
Annuities, which are insurance contracts, come in many shapes and sizes. They include fixed-rate,
in which the principal compounds at a pre-set rate; variable, in which the principal
appreciates based on the performance of an underlying mix of stocks and bonds; deferred, which
require an upfront investment with payouts down the road, and immediate, which turn a lump
sum, upon purchase, into guaranteed monthly payments for life. One attractive feature of
annuities is that, as with most individual retirement accounts, or IRAs, balances grow tax-deferred
until withdrawals begin. Even more important these days, annuitie s help remove
investors' worst fears: losing principal and running out of money in retirement.
Variable annuities also resemble an IRA because withdrawals can begin after you turn 59½. But
there the similarity ends. Given a dizzying number of features and restrictions, contracts for
some annuities -- variable and otherwise -- can run 300 pages or more. And because each comes
with its own small twists, these products can be very difficult to compare.
LOW BOND YIELDS and a sagging stock market have forced big insurers to re-evaluate their
annuities strategies in recent years, and some major providers, including Hartford Financial
(ticker: HIG), John Hancock, ING (ING), Genworth Financial (GNW) and Sun Life Financial
(SLF), have opted to exit the business or scale back. Most of the remaining companies have cut
back benefits significantly on new contracts.
"We've seen investment options in variable annuities diminished, guarantees brought down
substantially and fees going up," says Nigel Dally, an analyst at Morgan Stanley. "Protracted low
interest rates and high volatility in the stock market have made it far more expensive for annuity
companies to support their products."
For investors, however, all is not lost. There are still competitive products that provide
significant assurances for a reasonable price. Barron's has combed through hundreds of annuities
to come up with a list of 50 best-in-class investments.
The tables below list highly competitive contracts in five annuity categories: deferred variable,
fixed index, fixed deferred, immediate, and longevity insurance, which is geared toward 55-to
65-year old investors who won't begin collecting until they turn 80 or 85.
"Longevity insurance removes the big challenge in retirement planning: knowing when you're going to
die," says Adam Rolewicz, director of Opus Advisory Group in Purchase, N.Y. "Knowing you'll have an
income at a later age makes it easier to plan how to invest the rest of your money."
WHILE LOW INTEREST RATES have impacted all types of annuities, the category that has
been hit the hardest is also the biggest: variable annuities. Of the $231.1 billion investors poured
into annuities last year, 67% went into variable annuities, according to the Insured Retirement
Since the stock market crash of 2008, insurance companies have tried to one-up each other with
increasingly generous living-benefit riders, guaranteeing a withdrawal rate for life, even if you
live to 100 and the assets in your account are depleted. Demand for such products has been
strong: Almost nine out of 10 variable annuities sold in 2011 had such a rider.
But many providers apparently promised more than they could afford. "Insurers try to cover the
risk of offering generous lifetime guarantees by buying Treasuries and long-term swaps, but this
doesn't work well when interest rates are so low," says Tamiko Toland, managing director at
Strategic Insights, a market-research firm.
To compensate, annual withdrawal guarantees have been reduced -- to around 4.5% for a 65-
year-old from 6% a year ago. And the annual costs for these add-ons have gone up about 25%, to
more than 1% of assets.
Another way many insurance companies, including MetLife (MET), RiverSource and AXA
Equitable, are trying to bring down the cost of operating variable annuities is by restricting
investment options. Lincoln National (LNC), one of the country's highest-rated insurers, added
five asset allocation models to its regular line-up of mutual fund investment options in its
American Legacy and ChoicePlus variable annuities, and investors are given incentives to select
them. For example, those who choose an asset allocation model may get a 5% lifetime
withdrawal rate at age 60 instead of 4% for investors who choose to invest among the mutual
funds. "This reduces the cost of hedging…and allows us to offer a sustainable product," says
Brian Kroll, Lincoln's head of annuity solutions.
Investors slowly may be catching on to these changes. While variable-annuity sales rose 12%
last year, to $155.5 billion -- the highest level since the 2007 peak of $183 billion -- they
slumped 7% in the first quarter of 2012.
If there is a positive spin for investors from the recent shake-out in the variable- annuity market,
it's that some of the stronger companies, including Jackson National, Ohio National, Guardian,
AXA Equitable, Nationwide and Pacific Life, are likely to keep coming out with competitive and
unique products to set themselves apart from their peers, says Scott DeMonte, co-owner of VA
Edge, an annuity-oriented consulting firm.
DESPITE VARIABLE ANNUITIES' overwhelming popularity, some advisors say most
variable annuities should be avoided because they are too expensive. The average variable
annuity charges a 1.34% fee for insurance and administrative expenses on top of fees for the
underlying investment, which average almost 1%. All in, that's an average of almost 2.3%,
compared with 1.2% for the average mutual fund, according to Morningstar.
Most annuities also have surrender charges, or fees for withdrawing your money. Fees typically
begin at 7% or 8% in the first two years after purchase, and decline each year thereafter before
expiring after seven to nine years.
Fixed index annuities, a variation on fixed annuities, have been gaining attention lately. Most of
the portfolio grows at a fixed rate, but a variable component is pegged to an index, typically the
While fixed annuities usually beat the rate you would get on a certificate of deposit or a money-market
account, their rates have been only between 1.5% and 2.5% these days. Investors have
been choosing fixed index annuities as a better-paying alternative. Sales of indexed annuities
rose 14% in the first quarter of this year, the only annuity category whose numbers grew.
With these hybrids, your money is invested in investment-grade bonds and Treasuries. The
insurer uses the interest generated by these investments to buy options on an index. If those
options pay off, investors get the appreciation of the index–although participation typically is
capped at around 6%, meaning that if the stock market goes up 10% or 20%, you earn 6%. In
exchange, if the market declines, you are guaranteed to have no negative return. The account
value usually is reset periodically to reflect and guarantee appreciation.
A fresh and popular wrinkle in these indexed annuities is a so-called income rider, which
guarantees investors a minimum annual payment for life at various ages. If you begin
withdrawals at 65, for example, your payment will be lower than if you begin at 66 (see the
In these and other fixed annuities, the pricing is built into the payout rates, so the only sound way
to size them up is by comparing what you ultimately pocket if you go with one contract over
THE MOST BARE-BONES KIND OF ANNUITY is an immediate annuity, and it is the type
most favored by financial advisors to address investors' concerns about outliving their money.
Quite simply, you give an insurance company a lump sum, and based on formulas that crunch
life-expectancy data, interest rates, insurance fees, and other factors, the insurer guarantees you a
certain income, usually for life.
For example, a healthy 65-year-old woman who buys an immediate annuity with $300,000 can
expect to get a monthly income stream, starting right away, of about $1,600, or $19,200
annually, no matter how long she lives. By age 88, her life expectancy, she will have been paid
If you die before your principal is paid out, the insurance company keeps your assets. But there
are a number of variations on this simple annuity to appeal to investor concerns. For example,
you can arrange the annuity to cover the lives of both spouses, adjust for inflation, or be
guaranteed to pay for a certain period even if you die within that period.
The costs of guarantees are reflected in the payout. The table "Best in Class" shows how
payments can vary.
The variation that's best for you comes down to your income needs and how long you think you
will live. For example, an inflation rider could make sense for an investor with expectations of a
very long life. But the embedded costs of the inflation rider will result in lower initial payments.
"It can take 12 to 15 years before the payment grows to what the initial amount would be without
the inflation rider," says Debi Dieterich, senior annuity analyst at AnnuityAdvantage.com. If you
have a long life, eventually your total payout will be greater with the inflation rider, but in the
first decade or more "you lose the use of that money," Dieterich says.
Even with all the guarantees, some investors aren't willing to live within the strictures of
annuities. Indeed, there's a chance they will do better: While a $200,000 investment in a group of
high-quality blue-chip stocks paying 2.5% will provide income of only $5,000 in the first year,
the payout may grow faster than inflation over time as companies lift their dividends. And if you
look at the investment as a deferred annuity and reinvest all of the dividends for 10 or 15 years,
the yield on your original investment will be significantly higher, and the principal likely will be,
But you take the risk of a bear market, which can be especially painful if it occurs early in your
retirement. And experts say it is hard to beat the so-called mortality benefit you get from pooling
your assets with other annuity investors. Quite simply, people who live long get subsidized by
those who don't.
ONE OF THE MORE INTERESTING NEW PRODUCTS in the annuity industry is a form
of a deferred income annuity called longevity insurance. This is geared toward folks in their 50s
and 60s who are grappling with one of the most variable factors in retirement planning: how long
you will live.
Longevity insurance provides a income starting late in life, say, at age 80 or 85. "The reason it's
so attractive is that you have such leverage when go out that far -- 50% of the population dies
between 65 and 85 -- [as] you get the money from people who died, and compounding based on
a very long bond rate," says Matt Grove, vice president in charge of the annuity business at New
When used properly, annuities can remove concerns about longevity, and lower overall
investment risk. This can make investors more comfortable allocating assets to riskier
investments, ultimately increasing overall returns.