Several of my clients have contacted me lately to ask my opinion on the “new” options for their 403b’s. These new options are annuity based investment plans, some straight variable annuities, while others have some limited down side protection [10% in the one I saw]. This is an ongoing pattern from companies trying to capitalize on the loss of confidence of Wall Street and it’s mutual funds, which have been heavily pushed for the last 30 years. We are still seeing outputs from mutual funds in general while equity mutual funds are the heaviest hit. Trying to capture those dollars is the name of the game for all financial companies now.

I have never been a big proponent of deferred annuities. Immediate annuities have a place for folks who want to assure themselves of a certain level of income for life. But deferred annuities in my opinion are more problematic. Variable annuities have the same problem as mutual funds with the big market downturns dramatically effecting outputs. But the biggest problem with deferred annuities is that they must be backed by short and immediate term products, which will give folks lower rates of return. The indexed annuities will always have much lower cap rates than the indexed life products for this reason. With an annuity the company must be prepared to give the money back at any time and therefore must use investing strategies that allow that type of liquidity. [Read more...]