Many Planners Pan Equity-Indexed Annuities

UTTER THE WORDS "equity-indexed annuity" to a financial planner and chances are she'll react with a harrumph. Diana DeCharles, an investment advisor in Shreveport, La., pulled no punches: "I've never run across any that I'd want anyone to own."

That's pretty definitive. But indexed annuities are a startlingly fast-growing part of the business aimed at boomers planning for retirement. More than $123 billion is invested in indexed annuities today, up nearly ninefold from $14 billion in 2003.

Why? Probably because there's something comforting about the idea of buying an insurance policy that protects you against outliving your savings. If on top of that you can reap some modest gains from the market without the risk of losing any money if stocks tank, then all the better.

Indexed annuities are supposed to do just this. Like other annuities, these are contracts with an insurance company in which you fork over money and the insurer pays you a guaranteed minimum amount of interest on it. The added bonus is that your annuity is linked to a stock index; if the index rises you get paid some added interest. The idea is to offer a middle ground between conservative fixed annuities and aggressive variable annuities. In addition, you don't pay income taxes on the earnings until you start withdrawing.

But the devil is in the details, and with indexed annuities there are lots of details. There are so many, in fact, that Securities and Exchange Commission Chairman Chris Cox, a former Republican congressman not known for being a lover of regulation, is proposing to bring them under SEC jurisdiction. If that happens, only people with securities licenses could sell them, and insurers would have to register them and file prospectuses with the SEC, disclosing terms and fees. (States currently regulate them as insurance products.)

After doing some digging, we can see why there's so much flap. For one, there's no good independent source that evaluates the different indexed annuities out there in the way there is for mutual funds. The lack of information, combined with the complexity and wide array of indexed annuities, makes it tough for DIY investors to shop for the best deal or to even know what parameters they should look for. Between "participation rates," "caps," "surrender charges" and "renewal rates," there are a lot of variables to decipher and nail down.

"I get confused looking at some of them, I can't imagine my mother doing so and figuring out what's appropriate for her," says Jim Sonneborn, a financial planner in Chatham, N.J.

Unscrupulous marketers also lurk, often targeting the elderly with hard sales pitches. We even found one web site, best-index-annuities.com, proudly featuring a picture of SmartMoney Magazine, although SmartMoney hasn't recommended or done business with it. The site also displayed logos of just about every financial-services company in existence, from Bank of America (BAC) to ING Group (ING). I was unable to reach the operator of the web site, which screams out improbable offers like "16.04% 1st Yr Interest Rate! GUARANTEED! INSURED!!! (Hurry! Ends Soon!)"

Chad Tope, senior vice president of distribution for ING's fixed-annuity business, confirmed that "to our knowledge" ING doesn't have any business relationship with best-index-annuities.com either. Tope says that some in the industry have indeed gone "too far" in aggressively marketing indexed annuities, whereas they were originally supposed to be a safe place to save money in the face of falling interest rates at banks.

Bottom line, if you're looking at indexed annuities as a way to safely play the stock market, then you'll likely be pretty angry when it's all said and done. DeCharles, the planner in Louisiana, recalled a client who locked away $100,000 in an indexed annuity and after nine years had made zilch beyond the minimum 2% interest guaranteed to him. That miserly return didn't even offset the corrosive effects of inflation. "He would've been a lot better off in many other different places."

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