Ramsey: Your bank’s advice is bad. NAFA Response

April 30, 2014 by NAFA

Dear Dave,

I want to roll over a 401(k), and my bank is encouraging me to roll it over to fixed annuities. Is this a good investment?

John

Dear John,

More times than not, when you go to a bank for investment advice, what you’ll get in the bargain is bad advice. And that’s the case here.

I’d move toward a traditional IRA, in a series of good growth stock mutual funds. Put it across four types of accounts: growth, growth and income, aggressive growth and international. What you’re looking for, John, is a great track record for your investments. You want a track record so ridiculously good that it gives you a great sense of comfort, even though there’s no guarantee of what’s to come. And there are mutual funds out there that can do just that for you? I own one that’s over 70 years old, and it has averaged nearly 12 percent over that time.

Lots of people talk in “what ifs” when it comes to investing. Well, you can play that little game all day. But if the economy goes completely down the tubes, and the government destroys things like mutual funds and real estate completely, your little bank-recommended annuity isn’t going to make it, either. The banking system as a whole will fail if all the mutual funds close because they’re all based in publicly traded companies. And that means virtually every business you drive by on your way to work would be out of business. A bank’s not going to survive that kind of thing.

If you’re looking for things to help you survive the apocalypse, you’re talking about food and water. But if you want rational, well-reasoned investments, you need to look at growth stock mutual funds and paid-for real estate. That’s what I do. — Dave

NAFA Response

NAFA, the National Association for Fixed Annuities, was very intrigued by the advice you gave this individual. The world of fixed annuities is governed by very strict laws of disclosure and suitability determination before any recommendation of a product can be given. The law requires that the individual providing the advice, must ask very prescriptive questions about the individual’s age, tax situation, current assets, risk tolerance, etc., to name only four of the 13 areas of financial objectives that are required to be discussed and evaluated BEFORE any recommendation can be made. NAFA believes that not all annuities are right for all Americans, nor is any one annuity the only choice for all of an individual’s retirement funds. But we also believe that unless you know all there is to know about the individual’s financial goals and retirement plans, you don’t have any basis for making ANY recommendation on what the individual should do with his or her money.

We must also point out a very misleading and erroneous statement in your advice to “John.” You state:

But if the economy goes completely down the tubes, and the government destroys things like mutual funds and real estate completely, your little bank-recommended annuity isn’t going to make it, either.” You failed to inform John that the “little bank-recommended annuity” is issued and insured by state-licensed insurance company. John would do well to know before taking any free advice from your column that the insurance industry was one of the few financial sectors to weather the Savings & Loan Crises of the 1980s and 90s, the economic collapse of the early 2000’s, and what is called the “Great Recession” of 2008.

But the more important message you failed to give John and your readers is that with a mutual fund, your money is invested DIRECTLY in the market and you take the losses along with any gains. Fixed annuities are the exact opposite. Because they are insurance products first, John’s premium and interest earned is never at risk from market losses. According to Morningstar, over 11,584 out of the 11,585 U.S. and international stock mutual funds that they tracked lost money in the 2008 market crash. Meanwhile, during that same time, every individual who owed a fixed annuity lost NO money.

You are also wrong in saying that a fixed annuity is an INVESTMENT. It is not, nor should it be considered as an investment. A fixed annuity, whether sold through a bank or other distribution channel, provides insured guarantees that you cannot outlive your savings, you will never lose money because Wall Street does, and you will always earn a minimum interest no matter what. With a fixed annuity your money is NEVER at risk in the markets. Your money is protected by the state insurance laws on solvency, non-forfeiture standards, and explicit reserving requirements made and continually watched over by the state insurance department.

However, NAFA is not recommending that John buy a fixed annuity. As we said, we know nothing about John or his financial needs. We are merely recommending that John receive the most accurate, complete, and actionable information that will help him to further educate himself, and respectfully suggest that he seek financial professionals who have access to the best products and best information.

Sincerely,

Kim O’Brien

President & CEO

NAFA

NAFA, the National Association for Fixed Annuities, is an advocacy trade association dedicated exclusively to fixed annuities by educating regulators, legislators, journalists and industry personnel, about the value to fixed annuities and their benefits to consumers. NAFA’s membership represents every aspect of the fixed annuity marketplace, covering 85% of fixed annuities sold by independent agents, advisors and brokers. NAFA was founded in 1998.

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Originally Posted at NAFA on April 2014 by NAFA.