Let's get this out of the way: I'm generally not a big fan of annuities. Many annuities have high costs, are difficult for consumers to understand, and are often sold because they result in high commissions to salespeople, and not because they're necessarily the best option for the client.
However, not all annuities are in the same boat, and the right kind of annuities can be smart investments for many people. I recently had a chance to speak with Pat Rowan, Managing Director of TIAA & CREF Income Products, who wanted to set the record straight.
Matt Frankel, The Motley Fool: The primary reason I've written negatively about annuities in the past is the fees. Yet, you claim that TIAA's annuity products are different. Care to explain?
Pat Rowan, Managing Director, TIAA & CREF Income Products: You're absolutely right that lots of annuities come with high fees. But it's important to point out that these are often retail annuities -- that is, annuities sold by salespeople to the public. These are the ones that trigger the bad press because many are aggressively sold, have high sales loads (commissions), high surrender charges, and high investment expenses.
On the other hand, there are in-plan annuities, which are offered directly to employees by companies like TIAA. These actually may have lower costs than many other investment options. For example, TIAA's variable annuities and mutual funds are surprisingly low-cost. 90% of them actually have expense ratios in the bottom quartile.
Frankel: What about surrender charges, sales commissions (loads), and other charges?
Rowan: Our variable annuities have no surrender fees whatsoever, while our fixed-income annuities have options for flexibility in creating income or a variety of distribution options that have no surrender fees. Our annuities don't have sales loads baked in to the price either. Our TIAA Traditional annuity, which is our flagship fixed annuity product has no direct fees at all.
Frankel: Another common complaint about annuities is that in addition to having high fees, the fees are often misunderstood by consumers, or worse, the consumer doesn't know they're paying certain fees at all. Do you feel that TIAA's customers are well-informed when it comes to the costs of their investments?
Rowan: Well, for starters, the most often misunderstood or unknown fee customers end up paying is a sales load, which is a non-factor when it comes to our products. And we take consumer knowledge very seriously -- we want them to understand all of their investments thoroughly and know exactly what they're getting into.
Frankel: One quote I've seen several times is Ken Fisher's "Anything you want to do with annuities, there's a better way to do." How would you, as an annuities professional who obviously believes in your product, respond to this?
Rowan: I'd say that there are some problems involving risk that annuities just solve better than any other type of product. For example, I don't know any other way to guarantee income for life. Last year alone, we paid annuity income to 32,000 people over age 90. In a 65-year old couple, there's a 64% chance that one spouse will live past 90, so providing guaranteed income for life is much more important than many people make it out to be.
Annuities can be a great way to protect against a longer-than-expected retirement, market swings, cognitive impairments, you name it, provided that you choose an annuity with low expenses.
It's also important to point out that annuities don't have to be your only investment strategy. In fact, the peace of mind that comes with an annuity can allow you to take on more risk with your other investments, knowing that you'll have guaranteed income in the event of a stock market crash or other adverse event.