Jim Chanos, one of the best-known short sellers on Wall Street, was asked in a recent Interview about the most memorable trade of his career. His answer was Baldwin United Insurance Company. It was the largest corporate bankruptcy of its day even though it was one of the most successful sellers of annuities. Chanos explained why Baldwin stood out for him, especially given a storied list of failed companies that includes Enron:
“You could simply look at public documents like insurance filings and letters and at the state insurance departments and actually prove they were not true. Yet people were recommending the stock despite all the criminality that was going on there, and as a young analyst I was banging my head against the wall because I was literally holding onto smoking gun documents saying that what Merrill Lynch and others were saying about this company just simply was not true.”
It’s important to remember not all insurance companies were doing what Baldwin was up to.
I found myself reflecting on this Chanos interview last week while a forensic accountant named Tom Gober presented at a DOL EBSA inquiry, educating about how some insurance and annuity companies are leveraging their balance sheets in ways that are not well understood or appreciated by the regulators or ratings agencies. Tom’s been trying to raise awareness of the risks inherent in lower transparency and higher leverage of offshore reinsurance for years, and I’m sure he must have felt his head banging against the same wall Chanos experienced so many years ago with Baldwin.
In our experience, the pension industry has thus far chosen to ignore Tom’s warnings. As it was with Baldwin, today not all insurance companies are doing the same degree of leveraging. The question we’re asking ourselves at Annuity Research & Consulting LLC is: How much longer can plan consultants continue to claim ignorance as a safe harbor defense? The answer may come from the DOL by the end of the year.
A second issue troubling me is this quote from a DC plan expert on LinkedIn on 7/31/23:
“When DOL discussed retirement payout, they were thinking about ways to make retirement distributions more like pension payouts. Not EIAs or VAs or captivizing plans with annuities that can’t be replaced by sponsors.”
Assuming “captivizing” means the same as captive (holding prisoner), and “EIAs” means the same as fixed index annuities (FIAs), the intent seems to clearly cast doubt on annuities as prudent retirement tools. A common critique among the Registered Investment Advisor community seems to be that all annuities are over-priced (VAs), lacking in transparency (FIAs), and/or without any liquidity or survivorship rights (SPIAs).
We agree that retail-priced products of any kind do not belong inside institutional plans.
“Many annuities are now no-load, and more transparent decumulation products are coming to market specifically to meet ERISA standards.”
Mark Chamberlain
The truth is many SPIAs do offer transparent pricing (low load with no fees), have survivorship options (cash refund and period certain), and in some cases even have redemption rights. SPIAs with all the above are a well-kept secret since neither RIAs nor agents like to acknowledge their existence; but they are the pension-like income products referenced above. Many annuities are now no-load, and more transparent decumulation products are coming to market specifically to meet ERISA standards.
How much longer can plan consultants continue to hold their position of contempt prior to investigation of “institutional annuities,” or even just mortality pooling as a risk management tool? Former physician turned advice-only financial planner David Graham, MD wrote an objective opinion about the different kinds of annuities on his blog called, “Which Annuities Are Good for Retirement?” Here’s an excerpt:
“Annuities, when used appropriately, lower both potential risk and possible reward. For significant current income needs, a SPIA is a good tool. No one can guarantee the stock market will give you stable, lifelong income. An annuity will. But there are opportunity costs of using the money for an annuity rather than choosing a different way to invest. Since all investments are tradeoffs, you must understand the pros and cons.”
It’s among the most balanced analyses of annuities I’ve ever read; you can find it on the FiPhysician website.
And as with the lesson taught by Jim Chanos, ARC strongly recommends you do insurer counterparty risk evaluations independently of ratings agencies—it’s in the best interest of participants. You can learn about Tom Gober’s work at www.whatisthetsr.com/.
Mark Chamberlain is a Co-Founder and Registered Investment Advisor of Annuity Research & Consulting LLC(ARC), a fee-only RIA. He receives no financial benefit from either Tom Gober’s TSR or David Graham’s FiPhysician. ARC recently published a free e-Guide to help educate plan participants about SPIAs available outside plans: www.RetirementSoon.org/.
SEE ALSO:
• Richter-Gordon, Chamberlain Launch Firm to Vet Lifetime Income Options in 401(k)s
• Annuities and Institutional Best Practices: A Good Fit
Mark Chamberlain, BCF, is Co-Founder of Annuity Research and Consulting, LLC and serves as an advisor to the Insurance and Annuity Specialty Group at the Center for Board Certified Fiduciaries.
Mark makes an important point. There are multiple issues for 401(k) fiduciaries. First, publicly-traded life/annuity companies put the interests of their shareholders first. How will a 401(k) fiduciary justify choosing an annuity provider that subordinates the interests of the participants second. In addition, some life/annuity companies are partnering with asset managers to offer target date funds with guaranteed lifetime withdrawal riders. These riders entail annual fees that will be forfeited if the participant never exercises the rider and starts receiving income-for-llfe. Third, indexed annuities are financially-engineered products that are not transparent enough for 401(k) plans. A truly pension-like annuity would involve incremental contributions over many years, and conversion to income at retirement. The participant’s goal should be to generate the amount of income at retirement that, coupled with Social Security benefits, will cover his or her essential expenses in retirement.