Annuity products boomed in 2018 and continued to perform well in 2019, but surveys and analysis from the first half of 2020 showed the sales of annuity products on a decline, and the lack of investor education may be to blame. Conventional wisdom suggests that in times of economic volatility and uncertainty, the safety and guarantees of annuity products — excluding variable annuities — would be more attractive to investors looking to protect their retirement assets. This theory has been supported by years of data, but 2020 has so far proven to be an outlier.
Shocking much of the finance industry, annuities have not sold as well during the unexpected economic whirlwind of 2020. In general, the sale of annuities have decreased 16% in the first half of 2020 as compared to the first half of 2019, selling $104.4 billion worth of products. According to the Secure Retirement Institute, $124.8 billion in annuities were sold in the first half of 2020. This data was also in line with reports from the Life Insurance Marketing Research Association (LIMRA) who projected a 8% – 15% decline in annuity sales in the 2020 fiscal year as compared to the 2019 performance of annuity products.
This early 2020 performance prompted researchers at the American College of Financial Services to survey investors to shed light on the unforeseen decline in annuity sales. The “Retirement Income Literacy Survey” conducted by researchers indicated that investors were not properly informed about annuities and the benefits that investors could reap from certain types of annuities in an economy impacted by the deadly COVID-19 pandemic. Specifically, the researchers found that investors were interested in receiving guaranteed income from annuities as well as reducing the amount of risk in their investments but were unaware that annuities could attain both.
In a data table, researchers labeled investors based on their assessment of risk and their interest in guaranteed income. Their findings showed a stark disconnect in the understanding of annuity products. Individuals who were “risk tolerant” — as in having more risk in their portfolios — were more interested in the guaranteed income aspect of annuity products than those who found themselves to be “risk averse.” 17.7% of those surveyed who were risk averse were less interested in guaranteed income through an annuity compared to the 25% of those who were the most tolerant to risk. Initially, researchers thought that this data indicated that an investors assessment of risk had a correlation with their knowledge of annuities and desire for guaranteed income.
What researchers eventually established, however, is that there was an educational gap between respondents, as only 1.5% of those who participated in the retirement literacy survey were able to answer the three annuity questions correctly — only 9.8% of respondents correctly answered two of the three. As a result, a stronger correlation was found between investors who had a financial advisor and those who were more likely to be knowledgeable of annuity products and the benefits of guaranteed income.
Highlighting the need for knowledgeable financial advisors, the disconnect between what investors are interested in and their knowledge of how annuities can help them achieve their financial goals is clear. 38.7% of respondents to the retirement literacy survey said they were less comfortable assuming risk in their investments, yet, there was a decline in the sale of annuities in the first half of 2020 — a year that has been plagued by the economic destruction of the coronavirus. Annuity vehicles, such as fixed-indexed annuities would achieve the goals of reducing investment risk as well as guaranteeing income and even protecting an investor’s principal, but sales of these vehicles dipped 26% in 2020 compared to 2019. A potential solution to this decline would be an increase in investor education.
The results of the American College of Financial Services retirement literacy survey highlight the necessity of receiving a financial education from a licensed advisor who can introduce investors to annuity products — other than variable annuities — that eliminate investment risk while providing opportunities for guaranteed income throughout retirement. As the data and theory suggest, the correlation between investors’ interest in guaranteed income and reducing risk are not mutually exclusive, instead it is a direct relationship with most annuity products — like fixed-indexed annuities — which shows the importance of having a retirement phase advisor who is an expert in annuity vehicles to properly educate investors as they prepare for retirement.
Removing the risk of volatility in an investment portfolio during a year as tumultuous as 2020, with an economy infected by COVID, is especially important for individuals who are in or nearing retirement. The fact that annuity sales have fallen during the most volatile year in over a decade shows that investor money is being tied into unsuitable vehicles, despite investors wanting to reduce risk in their portfolios. As a result, many investors don’t know which vehicles will reduce risk and allow them to achieve their financial goals, giving credence to retirement phase experts and the work they do to educate investors about retirement saving vehicles. Having a proper education about the benefits of annuities, and the dangers of variable annuities can increase the knowledge of investors and their ability to achieve their financial goals in retirement.