Investment-Only Variable Annuity – A “Back-to-the-Future” Variable Annuity Vehicle

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Affluent investors and retirees want a perfect solution: an added source of guaranteed (and inflation-indexed) income beside Social Security benefits. But they loath the idea of giving up control over their retirement nest egg. Well, there’s a solution at hand. Fiduciary advisers can help clients achieve these seemingly irreconcilable concepts with a back-to-the-future investment-only variable annuity – IOVA.

Annuities, in one form or another, have been around literally for several millennia. Classic defined-benefit plans are rarer today than dodo bird sightings and Americans are living longer and – with the great resignation – retiring earlier. As a fiduciary adviser, I believe that annuity products can help pre-retirees accumulate assets tax-deferred and provide secure retirement income for retired Americans.

Many retail variable annuities (VAs) are laden unnecessarily with high mortality and expense (M&E) fees, lengthy and hefty surrender charges and unneeded and costly riders.

If a particular VA is too expensive, the potential benefits of tax-deferred savings will be undermined by cost drag. Yet in 2021, VA sales soared $125.6 billion and total U.S. VA assets topped $2.5 trillion at year-end.1 (See chart of 2021 Retirement Assets and Annuity Reserves.)

According to Morningstar Direct, the typical M&E charge in 2019 was 1.30%.2 From 2005 – 2019, the average commission charged on retail variable annuities was 6.09% and many VA contracts had all-in annual expenses of 300-350 basis points.3