A Close Look at Ibbotson’s Research on FIAs
January 30, 2019 by Michael Edesess, Robert Huebscher
The market for fixed-indexed annuities (FIAs) – previously known as equity-indexed annuities – is growing rapidly, with sales of more than $60 billion annually. We did a careful analysis of two products that are available on the market. Our conclusion is that these products are not a bad choice for an investor who is extremely sensitive to loss of capital. But a simpler, do-it-yourself alternative is better.
We caution against extending our conclusions to FIAs in general. Our analysis was limited to two products that were the basis of a recent research study by Roger Ibbotson. Those products have higher costs than FIAs in general, and those costs adversely affect their performance.
Explanation of FIAs
Although the details vary, and optional riders are available that further complicate the product choices (we will not consider the optional riders in this investigation), FIAs have certain common features. Those features are governed, in part, by the participation rate, the cap and the surrender fees, each of which I will explain.
The main feature is that FIAs guarantee that the “paper” value of the investor’s account will not fall below a given minimum. Most often, that minimum is the amount that the investor originally put into the account. Thus, the investor is guaranteed not to suffer a loss of principal.
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