Facts & Fables

One preferred tactic is to negatively compare the performance and fee structure of a variable annuity with that of a stand-alone mutual fund. But Mark Mackey, CEO of the National Association for Variable Annuities, discounts what he sees as an apples-to-oranges comparison, and says an annuity is much more than a simple investment product and has a number of useful insurance features.

"When comparing VA fees with a stand-alone mutual fund, of course there will be an additional fee to pay for any sort of insurance features," he explains. "But I think people will be surprised that annuities are not all that much more. People assume the price difference between the two is the mergers-and-expense fee from the sub-account, but that's not the case. In many instances the management fees are actually lower because of the arrangements the companies have with various managers."

Bahu agrees and says some companies have done a good job of introducing low-fee products. But he cautions that with any variable product, the advisor and client have to be sure they're getting the intended benefits.

"Some of these products do, in fact, have high fees," he adds. "We ask people upfront why they want to be in a variable annuity, in order to make sure the product is understood. If they say tax advantages, these advantages should more than cover any fees."

As for performance, Mackey notes that most of the annuity-to-mutual-fund comparisons compare a VA to an index fund. They assume the purchaser of the fund is going to employ a buy-and-hold strategy. They don't realize that the average mutual-fund holder turns over an entire portfolio every four years, and they pay taxes on any gains.

By contrast, an annuity is a long-term investment vehicle. The built-in surrender charges and penalties for early withdrawal provide for a measure of forced discipline, which is a necessary component in retirement planning for a majority of Americans. And when used properly, Mackey says, a five-year or seven-year sales charge will never come into play.

"In relation to the tax-advantage issue, people say that variable annuities do not belong in qualified plans," Mackey says. "But they're perfectly appropriate in qualified plans because of the insurance benefits. Annuities were specifically created for the qualified market and Congress has legitimized the strategy."

Mackey lists the death benefit as the final criticism he and his organization hear. People often wonder about the odds of actually using it. For Mackey, this shows a fundamental lack of understanding of insurance.

"If someone purchases homeowner's insurance and never has a house fire, do they somehow feel cheated?" he asks. "The whole point is not to use insurance. Some $3 billion over and above the contract value has been paid out in death benefits – something happened and the family was made whole. For these reasons a deferred annuity is appropriate to serve the senior market, and an immediate annuity is absolutely appropriate."