If you’re a typical MintLife reader, somewhere between 25 and 45 years old, I have a request for you: call your mother.
No, she didn’t put me up to it. I want you to call Mom and Dad to warn them about a bad investment. They’ve probably already been invited to a free dinner and sales pitch, and if they believe what the guy in the suit tells them, that free steak could end up costing them a chunk of their life savings.
The product I’m talking about is called an Equity-Indexed Annuity, or EIA; or Fixed Index Annuity, or FIA. I’ll call them EIAs, for short. They’re sold to retirees and near-retirees by insurance companies. If you’re not in that category, you’ve probably never heard of EIAs.
Last month, I went to one of these presentations, ate the free steak, and grilled one of the salesmen. The pitch was well-honed. The salesguy wore a sweater, not a suit, and he said he was sick of losing his money in the stock market, too. Now he’s all about principal protection. He called himself a “safe money specialist.”
But what if there were a way to make money when the stock market goes up, without losing a penny when it goes down?
If you put your money in an EIA, the pitch goes, you can have exactly that. The presentation culminated in an amazing graph showing what you could have earned in a hypothetical EIA, compared to the stock market, from 1998 to 2008. As it turns out, these guys all use the same graph, so it was easy to find online:
That green line had me seeing dollar signs. And not just me: as of 2008 (the most current data I could find), investors had put over $123 billion into EIAs.
The green lie
EIAs are carefully designed to appeal to our emotions. Everybody loves watching their money grow. Everybody hates losing money. Furthermore, psychologists tell us that we hate losing money about twice as much as we enjoy making it.
So EIAs hide all the losses behind their backs. Here are some typical tricks:
* Early withdrawals are slapped with a massive penalty (“surrender fee”) of up to 20%, and the term of the annuity can be up to 15 years. The EIAs being sold at the dinner I attended only went up to 10 years, but there were some 80-year-olds in attendance.
* You don’t get all gains of the market. You might have an 80% “participation rate,” so if the S&P 500 goes up 10%, you only get 8%—or less. Dividends aren’t included. The way they calculate stock market gains is complicated, and it’s designed to turn a bull market into a baby calf market for your money.
* The EIA may include a large administrative fee or “margin fee”—say, 1.5% per year.
* Even though EIAs have been around since 1995, there is no way to look up historical performance data. If these things offered great performance, the issuers would be falling over themselves to make that data public, right? I asked our salesman about past performance. He took my email and said he’d get me the data. He hasn’t.
Don’t take my word for this. In 2008, SEC chairman Christopher Cox, not a guy known for being a tough regulator, announced that the SEC would begin regulating EIAs as securities. This would mean every sales pitch would require clear disclosures about fees and restrictions, just like mutual funds. “Equity-indexed annuities are among a handful of products most often involved in senior investment fraud,” said Cox at a hearing.
Dateline NBC did a remarkable expose on EIAs in 2008, catching sleazy annuity-pushers in the act and talking to seniors who lost thousands by investing in EIAs (“you can’t lose money!”) without understanding the surrender fees. You can read the entire transcript online.
Selling out seniors
The Dodd-Frank financial reform bill was supposed to include a provision to allow the SEC to regulate EIAs. But it was killed by Sen. Tom Harkin (D-IA), a friend of the insurance industry.
That means protecting retirees or near-retirees from an investment that’s very wrong for them is up to you. Call your parents.
One last thing. Remember that alluring green line, the one that let you sleep at night during a brutal bear market, thanks to your EIA?
I’d like to add my own line to the graph. If you’d purchased a 10-year treasury bill in mid-1998, you would have beaten the green line.
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