Morningstar - Q4 2021 - 7

Letter From the Editor
Bad Reputation
Jerry Kerns
Rightly or wrongly, annuities carry a lot of
baggage. There's a perception that annuities are
products that are " sold, not bought " ; that
they're too opaque, complicated, and expensive;
and thus, that the insurance companies
that sell them will always come out ahead. There's
an element of truth to these views, and only
the industry is to blame for offering the
mainstream investing public an array of complex
products that only a financial professional
can truly understand. (And often, that
professional's incentive is not aligned with
the investor's.)
Despite annuities' bad reputation, the concept
is appealing: Simply pay into a pooled investment
arrangement and receive a stream of income
for a lifetime (or some other set amount of time).
People have been participating in annuitylike
arrangements for hundreds of years. Social
Security is the ultimate retirement annuity.
Annuities help solve a big retirement challenge:
longevity risk. There is much handwringing
in the industry over the difficulty of estimating
how much retirees can safely afford to
withdraw from their savings before running
out of money. Annuities take some of the
guesswork out of the equation. Yet, their use in
the retirement market is surprisingly limited.
Correction
In " A Clear Vision " in the Q3 2021 issue (Page 78), we wrote
that Clifford Capital Partners has about $300 million
in assets under management. The firm actually has about
$300 million in assets under advisement.
Morningstar policy researcher Jasmin
Sethi would like to see annuities live up to their
potential. She's especially fond of a subset
of annuities called guaranteed-income products,
which are simple to understand and should
appeal to everyday investors. The problem is,
there are all sorts of regulatory and operational
obstacles preventing these annuities from
becoming a standard part of retirement plans.
In a recent research paper, she detailed what
government policymakers and industry innovators
need to do to make them more accessible
to retirement savers. Being a realist, Sethi knows
that it could be awhile before the necessary
changes occur. So, in the meantime, as she writes
in our Spotlight ( " Safe and Sound, " Page 35),
financial advisors can play a large role in
steering clients to the best annuities and helping
them gain access to them.
John Rekenthaler's Ivory Towers ( " How to Use
Annuities in Retirement, " Page 12) discusses
how annuities compare with bonds in a retirementincome
portfolio and finds that it's not
always a slam-dunk win for annuities. As with
most things, a simple rule of thumb doesn't suffice.
" Regrettably, " he writes, " knowing when
to use annuities and when to avoid them often
requires specific analysis. " This is where
advisors come in.
In " Guaranteed Income for Retirees " (Page 15),
Aron Szapiro, Morningstar's head of retirement
studies and public policy, discusses the
immense policy challenges that are preventing
lifetime income options from being in retirement
plans. Szapiro says government can help
retirement investors by making it easier to put
money into high-quality guaranteed-income
products. He has a few ideas.
Finally, annuities don't always have to be
complicated. In " Guidelines on Making the Annuity
Decision " (Page 41), portfolio strategist Amy
Arnott details a simple formula that can
help investors determine how much, if any, of their
portfolio they should place in an annuity.
Echoing Rekenthaler, Arnott is careful to point
out the formula is just a starting point and
a deeper analysis is required before jumping into
the annuity pool. Still, she says, annuities
can be an important piece of the retirementincome
puzzle.
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https://www.morningstar.com/authors/2356/jasmin-sethi https://www.morningstar.com/authors/2356/jasmin-sethi https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q3/index.php#/p/78 https://www.morningstar.com/lp/magazine
Morningstar - Q4 2021

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