Invention Convention? Not when it comes to Variable Annuity Prospectuses
The infamous quote “everything that can be invented has been invented” by Charles Duell, Commissioner of the Office of Patents in 1899, apparently does not apply to the conventional wisdom of the Financial Services Industry circa ten years ago when the paperless prospectus was the supposed wave of the future. With the average Variable Annuity prospectus running 178 pages, it is no surprise that the Insured Retirement Institute and Cogent Research found recently that participants with at least $100,000 of invest-able assets were giving a big yawn to the thought of actually reading through a prospectus. The infamous cure for insomnia was only read by 17% of participants in a recent poll. The thought of wading through 100 sub- account descriptions plus fees, disclosures, caveats etc. is a turnoff for busy investors saddled with a volatile market, job concerns and retirement planning. At Annuity Think Tank, we believe savers and investors deserve better and believe that in a digital age, simplicity leads to a better educated and informed investor.
The cumbersome chaos of a paper trail that rivals Congressional bills may be part of the reason for the growing gap between benchmark performance and actual investor performance which stands at nearly 5 percentage points over the last 25 years according to Morningstar. On a $100,000 investment over 10 years, even if the performance gap were to narrow to 4 percent, thats’s a whopping $624,000 less at retirement for a 60 year old retiring at a maximum retirement age of 70. Today, ERISA retirement plan sponsors, thanks to a Department of Labor ruling, will have to keep Annual Summary Plan descriptions simple for retirement plan employees and provide additional fee disclosures to participants. Plan participants have had to some soul searching in choosing to read retirement plan literature as well . The performance gap mentioned above has been even worse for these participants according to the Employee Benefit Research Institute(EBRI) a retirement plan think tank.
So who are the winners and losers starting today in the ERISA marketplace?- the low loaders in mutual funds win at the expense of the Group Annuity gang but the real winners may be the retirement plan vendors, both Institutional and Retail, that can create an income for life with some guarantees. Right now, 50 percent of the income taken by retirees comes from systematic withdrawals and 28 percent from laddered annuity or bucket strategies but insurance companies are banking on income annuities to win the day in the long run. As in the battle between cable and the phone companies ten years ago, the outcome for decided advantage is still up in the air for control of the old Defined Benefit like income streams. The Insurance companies, however, with simplified disclosure, less complaints, safety, and volatile markets, have an upper hand going into the next phase of retirement plan regulation.
Decca Music said in 1962 that they did not like the Beatles sound and that guitar music was on the way out.. Let’s hope that paperless prospectuses and improved performance for savers and investors is on the way in and convolution in disclosure catches up with the digital age and is on the way out!