Informed consumers can be a powerful antidote to bad news about advisors who do wrong by their clients.
By Linda Koco
Move over, MyRAs. Small deposit fixed annuities are here. Well, let’s rethink that.
President Obama’s initiative to create small-deposit workplace retirement savings plans (MyRAs) with a savings bond has annuity professionals buzzing about how small deposit annuities could serve the same purpose but without creating another government program.
That purpose, according to the Administration, is to spur more workers to save for retirement and more employers to offer retirement plans, and to make it simple and easy to do so.
The discussions about using existing products for this purpose invariably brings up other possible candidates including payroll deduction individual retirement accounts (IRAs), solo and small group 401(k)s, Roth 401(k)s and adaptations to other existing workplace savings approaches.
But the annuity idea gets its own share of maybes from the insurance cheer section.
Not just any annuity, however. They are talking about small deposit fixed deferred annuities. More specifically, small deposit flex-premium fixed annuities. That’s a mouthful, but it’s also a real type of product and one that has been available in the industry for decades.
Small deposit annuities
These small deposit annuities allow consumers to make very low initial and ongoing deposits - $25 to $100 or more—and to have the benefits of annuities including tax deferral , death benefits, guaranteed payouts and more.
The products have interest rate guarantees too, the promoters point out. The guarantees aren’t supported by the full faith and credit of the U.S. government as in the MyRA program, but they do have carrier guarantees and the backing the state guaranty funds, the advocates contend.
The idea that gets floated around is that an agent who is licensed with a carrier that offers such a policy could piggy back on the publicity surrounding the MyRA and stir up some new business. Or maybe someone could point the Administration to the existence of these products, to use instead of the MyRA bonds?
But wait, there’s more. Actually, there’s not more. There is less, as in less potential than would seem to meet the eye. That is because the products have not been big sellers for quite a while, and for a reason.
Less not more
“The dominant trend is definitely away from small premium contracts, whether flex- or single-pay,” said Danny Fisher, publisher of The Fisher Annuity Index.
His firm lists 69 companies in its index of traditional fixed annuity products and rates, “and only eight of them have annuities that will accept monthly premiums of $100 or less,” he wrote in an email.
“In years gone by, there were lots of flex-pay contracts that would accept smaller monthly premiums. Not so anymore. Companies just don't want to fool with smaller amounts.”
There are probably more variable and indexed annuity contracts that will accept smaller premiums, he allowed, but his firm does not track those types of annuities.
Variable and indexed annuity products would not fit the bill as an alternative for the soon-to-be-created MyRAs, anyhow, since they are more complex and have more options than the MyRA or the small-deposit fixed annuities. They would flunk the simple-and-easy test.
Fisher points out that most of the companies that do accept smaller premiums are “heavy in the tax-sheltered annuity (TSA) market.” Created under Section 403(b) of the Internal Revenue Code, TSA products provide a tax-sheltered savings method for employees of public schools and certain charities. The TSAs “have to accept smaller amounts for payroll deduction,” Fisher said.
However, such annuities would not fill the MyRA shoes, since the MyRA is aimed at employees of private businesses, not public schools and charities.
Besides, according to the Internal Revenue Service (IRS) website, the employee’s deferred salary in 403(b) plans is “generally not subject to federal or state income tax until it's distributed.” That makes the TSA a no-go as a MyRA substitute from the beginning.
(The exception to the above tax point would be a 403(b) plan that offers designated Roth accounts. According to the IRS, contributions to such plans are made after tax but distributions are tax-free.)
No can do
Even if a producer were to try to catch the MyRA wave by creating a marketing campaign around small-premium fixed deferred annuities, it’s doubtful the campaign would draw many lookers or interested sellers.
As Fisher put it, “I found out a long time ago that it's almost impossible to get someone who has very little money in savings to start saving $25+ a month. It's much easier dealing with people who have already accumulated a large nest egg and want to set more money aside.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at firstname.lastname@example.org.
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