Fixed Indexed Annuities
A Fixed Indexed Annuity (“FIA”) is not a mutual fund, variable annuity, or any instrument that participates directly in stock or equity investments. A FIA also differs from direct equity investment in that it offers protection from market losses, a feature not found in direct investments. A FIA is a flexible premium deferred annuity issued by a life insurance company. The Pension Establishment dismisses fixed annuities as inappropriate for 401(k) plans because insurance companies are not “investment experts” as they are. They miss the point: insurance companies are “risk management experts”. Retirees face longevity risk, i.e., the risk of outliving their money, and insurance companies have responded to the baby boomers’ bulge by offering longevity insurance in the form of a guaranteed lifetime income that is contained in annuities.
It is hard to imagine an economy and financial system without insurance to protect our valuable assets: homes, cars, lives, health, boats, businesses and virtually every asset or circumstance that is exposed to the risk of loss. Insurance companies do not eliminate risk but rather manage risk. Risk management is a science rooted in the law of large numbers that permits the spreading of risks and improvement in the predictability of loss. Retirement savings, it turns out, are exactly the type of asset for which insurance is needed. We need insurance to protect against risk we can’t predict, e.g., a home fire or a market collapse that damages our retirement account. We cannot recover from such calamities without the help of insurance, yet currently very few 401(k) plans offer this safe harbor. U.S. Congressman George Miller of California, chairman of the House Education and Labor Committee has said, “When you have seen the market’s ability to create bubbles, you’ve got to ask whether the people trying to save for retirement should have to ride that risk.”