My financial adviser wants to roll my 401(k) into an annuity? Do you think this makes sense? -- Ron
I'm not saying that someone can't come up with a scenario where such a move might make sense. I suppose, for example, that putting your entire 401(k) balance into an annuity could be reasonable if your 401(k) balance represented only a relatively small portion of your retirement savings and the annuity achieves something that no other investment or strategy can.
But barring some pretty unusual circumstances, I would have a hard time coming up with a compelling reason to invest all or even most of your 401(k) in an annuity. So I can't help but wonder who benefits more if you make this move -- you or the adviser?
What makes me, shall we say, suspicious about this recommendation is that annuities are a classic "sold not bought" investment, which is to say that in many cases they are foisted on investors who may not fully understand what they're getting into or realize what alternatives may be available. One reason for this is that certain annuities—here, I'm thinking mostly of fixed index annuities and variable annuities with income riders -- can often pay very generous (from the salesperson's point of view) commissions that, consciously or not, may make some advisers more likely to suggest them.
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A recent report by Senator Elizabeth Warren titled "Villas, Castles and Vacations: How Perks and Giveaways Create Conflicts of Interest In The Annuity Industry" also noted that many annuity purveyors sweeten the pot for salespeople by providing a variety of other inducements and incentives, such as trips to vacation destinations, tickets to the theater or sporting events, golf outings and dinners.
Does this mean that every adviser who recommends an annuity is being driven solely by self-interest? Of course not. But you need to be aware of potential conflicts of interest when dealing with any adviser and decide whether or not such conflicts are unduly influencing your adviser's recommendation—and ultimately whether the recommendation is right for you. (This is true not just for advisers selling annuities, by the way. An adviser who proudly states he would never pocket a commission from an annuity and instead recommends a managed portfolio of mutual funds or ETFs may be taking a principled stand. Or he may be acting in his own self-interest because he'll collect an annual management fee year after year, in effect creating his own annuity income.)
I'm not anti-annuity. Annuities have some unique features that other investments don't have, the most important being that they can generate retirement income that won't run out even if investment returns are subpar or the financial markets go into a prolonged funk. But in my opinion some annuities blunt this fundamental advantage by getting too complicated. I also believe some advisers are far too eager to use annuities, applying them in situations where other investments or strategies might do just as well, if not better.
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Which is why I think that people who are a candidate for an annuity (and let's not forget that not everyone is) are better off with a type of annuity that does what annuities do best—i.e., generate lifetime income for retirement—and that does so in a relatively straightforward fashion.
On that score, it's hard to beat a plain-old immediate annuity for retirement income that starts right away or a longevity annuity for income that won't begin until later in life. And far from investing one's entire retirement stash in such annuities, I think it typically makes more sense to devote a portion of one's savings to an immediate or longevity annuity and invest the rest in a diversified portfolio of low-cost stock and bond funds or ETFs that can provide long-term growth and tapped as needed for additional income and to cover emergencies and unanticipated expenses.
So, back to your situation: What do I recommend you do? Your first step should be to put a few questions to your adviser: Why an annuity? Why this particular annuity? Why the entire 401(k) rather than just a portion of it? What's the downside to this approach? (Every strategy has a downside.) What alternatives are there to the annuity and why aren't they being recommended?
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Your adviser should be able to supply substantive answers to these queries, not off-the-cuff comments or canned remarks. I'd even want to see some research that demonstrates the benefits of the annuity and, ideally, some projections or analysis that compares this annuity to other alternatives (such as the annuity plus a regular investment portfolio I mentioned above). And by research, I don't mean the slick brochures that most insurers produce for sales and marketing purposes.
You should also request a detailed written breakdown of costs, everything from sales commissions to surrender charges for exiting the annuity to any annual insurance fees for the annuity itself as well as riders, if any. Getting a handle on annuity costs can be tricky, so you might want to check out this earlier column of mine that goes into more detail on annuity expenses as well as some other issues.
If after going through the process I described above, you have even the slightest misgivings about putting any of your money into the annuity, I'd suggest you hold off, and perhaps even seek an opinion from another adviser. You always have the option of investing in an annuity later on. But getting out of an annuity you regret having gotten into in the first place can be difficult and expensive. So don't make a hasty decision, or allow yourself to be pressured into one.
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