By Thomas E. Lambert & Christopher B. Tobe

This paper examines a looming possible crisis in many Americans’ retirement plans due to the proliferation of annuity products in their retirement investment portfolios. As defined benefit pension plans have almost completely disappeared as a means of retirement savings and have been replaced by defined contribution retirement plans over the last 40 to 50 years, a great number of private and public sector defined contribution retirement plans have become laden with insurance contracts called annuities. Of the remaining solid defined benefit plans many, through a process called Pension Risk Transfer are being converted to high-risk single entity annuities. Such products have been sold to employers and employees as “safe” and “guaranteed’ financial instruments that that are just as good as a defined retirement benefit plan backed by Federal PBGC (Pension Benefit Guarantee Corporation) insurance. The results of the analysis in this paper calls this into question, and with so many of these annuities having ties to investments and loans related to risky assets, the authors find that many annuity products are exposed to systemic risk that could lead to a bust in the pensions of many retirees and soon-to-be retirees. The “Emperor has no Clothes” as the life insurance industry has poured billions of dollars into advertising, lobbying, commissions & trade articles with misinformation on annuities with everyone afraid to call out the obvious fiduciary problems. To invest in annuities one must look the other way at one of most basic investment principals -diversification, i.e., “do not put your eggs in one basket.” Excessive monopolistic profits through secret spread fees have remained hidden with no US Federal regulation or oversight. This paper shows the drawbacks, weaknesses, and pitfalls of annuities as investments for retirement plans as well as the injustices of such plans toward lower income workers.

Source SSRN