How To Read The “Warning Label” Of Annuity Products
July 28, 2017I love silly articles that I see on social media sites, and my kids and I love to look at warning labels for things that make us laugh. This article combines both of these highly entertaining things that I like. Since most warning labels are in existence because of someone actually doing the things that are being warned against, I always want to meet these people.
As entertaining as I find wacky warning labels, not all warning labels are intended to be funny. And actually, not all warning labels are actually warning labels, either. Some come disguised as sales literature for financial products.
Buyer beware
Case in point: I recently met with someone who had a 401(k) account from a prior employer, and her financial advisor had recommended that she roll it over into an equity index annuity with him. She had not decided whether or not to purchase the annuity before our conversation, thankfully. During our meeting, we looked at the “warning label” (aka the fee disclosures) for the proposed annuity to see if it was a good deal. Here’s what we found:
- 10 year “surrender charge” — this means that if she wanted to get out of the annuity for any reason, including to change investments, advisors, or for poor performance, etc. in the next 10 years, she would have to pay a hefty fee to do so;
- “Mortality & expense” fees — this is the insurance component, along with the sales charges (aka what the advisor would be paid,) and administrative fees;
- “Management” fees — this was the investment component, which was in excess of 2.5% per year.
Finally, the track record of the investments inside the annuity was less than stellar, so she could potentially be paying 2.5% to actually lose money. If I could write a warning label for this annuity, I might have it say something like, “Product contains excessive fees,” or “Warning: your advisor might make more money on this than you do.”
After reviewing all of this information, she obviously decided to opt out of the annuity and transfer her prior account to her current employer’s 401(k) instead — knowing that her 401(k) had much lower fees combined with the ability to make changes to the investments without penalties, I think she made the right choice. The annuity’s “warning label” gave enough information about the product to make her consider another alternative.
Know what to look for
The lesson here is that investment products don’t come with explicit warning labels like hair dryers or plastic bags, but the language is there if you know where to look. Before you make any significant financial commitments, be sure that you fully understand the fine print on the warning labels, even if it’s not labeled as a warning.
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