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Continued: Keep your investments simple; forget about an EIA
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Q I recently attended two "free lunch" seminars designed to help senior citizens and retirees preserve their assets. In both events they were promoting equity index annuities (EIAs).
One seminar promised an 8 percent return rate and the other one talked about 6 to 9 percent.
I have had two Hartford variable annuities for about 10 years, so they are past the time limit to be subjected to surrender charges. Those, along with my Vanguard IRA and my wife's T. Rowe Price IRA, were all in mid-six-figure amounts before the stock market slump.
The presenter at one seminar wanted me to roll over both of the IRAs into an EIA fixed annuity; the issuer was AIG. The presenter at the other seminar also recommended an EIA, and said I would be better off to do a rollover of my Hartford annuities into an EIA; he didn't say who the issuer would be.
The essence of the EIAs are that, as the stock market goes up so does the value in your annuity, but when the market goes down the value doesn't decrease. ... Personally, I don't see any advantage in transferring any of my accounts to an EIA.
TOM,
BLAINE
A I wouldn't make the switch. You're right to be suspicious. I'm no fan of equity index annuities. The lure of the product is that it offers a return based on the combination of a fixed rate and part of the gain from a stock market index. The concept may be simple, but the product is extremely difficult to understand.
Here's what the main securities industry regulator -- the Financial Industry Regulatory Authority -- has to say about the product: "Although one insurance company at one time included the word "simple" in the name of its product, EIAs are anything but easy to understand. One of the most confusing features ... is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA with another."
Find out more about EIAs at www.finra.org/investors; choose "annuities and insurance" from the investment choices menu.
The bottom line is, it's too complicated a financial security. It doesn't pass the keep-it-simple test. And the switch isn't to your benefit.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org, or to kaching@startribune.com. Put "Your Money" in the subject line.
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