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The folks at Genworth (NYSE: GNW ) may have done us all a big favor. They did so for the wrong reason, in my opinion, but their decision's still a win for consumers.
Genworth recently discontinued its sales of variable annuities. Its reasoning is purely financial: They haven't been selling well. Genworth sold $151 million worth of annuities in the third quarter of 2010, down 30% from a year earlier. Some other annuities are also being discontinued, until their markets "develop further." (Previously sold variable annuity policies that remain in effect will be maintained.)
Whatever the reason for the discontinuation, I'm glad it happened. Variable annuities generally just stink. They tend to carry high annual fees of as much as 3.5%. They can also lock your money up for a long time, charging you hefty penalties if you want out. Even their tax advantage is iffy. The earnings in the annuity will grow tax-deferred, but they'll eventually be taxed at your income tax rate, which currently goes as high as 35%. Compare that with dividend-paying stocks, for which dividend income and long-term capital gains are currently taxed at 15% for most people.
Worse yet, some insurers are now requiring variable annuities buyers to invest at least 30% in bond funds. That mandate limits buyers' upside potential, since stocks generally outperform bonds.
Unfortunately, insurers are not shutting down variable annuities in droves. Overall, sales of the product through financial institutions are actually rising at a rapid pace.
The top variable annuity sellers include Prudential (NYSE: PRU ) and MetLife (NYSE: MET ) . Prudential sold $15.6 billion in annuities last year through the third quarter, while MetLife sold $13.2 billion. Hartford Financial (NYSE: HIG ) , which used to be one of the top sellers, retooled its offerings to be more conservative; its sales have since plunged to 20th place in the industry. Instead of discontinuing those products, however, Hartford will likely retool again.
If you're looking for investments to support your retirement, think twice or thrice before opting for ugly variable annuities. Most of us would be better served by fixed annuities or strong dividend-paying stocks. Learn more about sound retirement-planning strategies in our Rule Your Retirement service.
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