Annuity plan wed to mutual fund
Boston — There were no wedding announcements, no chuch services, no bells, not even a shower. The wedding may have been unconventional, but the marriage promises to be a lucrative one. It joined an insurance company and a mutual fund to give people a new product that could let them set aside a good deal more than "a little something" for retirement.
The newlyweds -- Nationwide Life Insurance Company and Massachusets Financial Services (MFS) -- joined together in financial matrimony to provide a combination of an annuity (a tax-sheltered investment intended to provide retirement income) and an investment in a mutual fund. Thus, the investor has the advantage of a tax-deferred investment plus the ability to move money from one type of fund (a bond fund, for instance) to another (perhaps a money-market or stock fund). So while the amount of income at retirement from the annuity is not guaranteed, there is the potential to make a good deal more money by switching to the most profitable fund at any given time until retirement. Of course, this assumes the investor has the ability to decide what will be "most profitable."
Basically, the new package -- known as the Spectrum Annuity -- offers three investment options:
* A variable account which offers the opportunity to switch into one or more of eight mutual funds managed by MFS.
* A fixed account which is the regular annuity offered by Nationwide. The money here is guaranteed against loss and earns a guaranteed interest. The investor receives a fixed retirement income.
* A combination of the variable and fixed accounts with the ability to switch all or part of the assets from the variable to the fixed account, or vice versa, after the first contract anniversary. After that, variable-fixed transfers may be made at six-month intervals.
The MFS/Nationwide annuity was first offered in February of last year. But because the original scheme was filed incorrectly, the Securities and Exchange Commission ordered the firms to halt sales of the fixed annuity in May. The fixed annuity is the only one of the nine Spectrum options where the principal is fully protected and the rate of interest is guaranteed. The problems with the SEC have since been cleared up, and the full variable-fixed annuity package is once again on the market in all states except New York, where some of the fixed-account funds are being sold and the rest are still awaiting approval.
"I expect sales will swing heavily to the fixed account," now that it is being offered, said Scott Logan, a vice-president of Massachusetts Financial. "An individual who's astute can do much better in the variable accounts, of course. But as economic conditions change -- and we're sure they will -- the fixed account will give the individual an anchor to windward. They can stick to the fixed annuity with its guaranteed interest."
The Spectrum annuity is "the first one of its kind that I know of," said Albert Johnson, vice-president and chief economist with the Investment Company Institute, the main mutual fund trade group. Other mutual funds do offer annuities, he said, but none of the others had the combined tax- sheltered annuity and mutual fund selections in one package.
This package is not available from insurance agents or from MFS itself. "Nationwide's own agents can't even sell it," laughs Claude Thomas, president of the sales division at MFS. It is only available through brokers working for firms that are members of one of the major stock exchanges.
Mr. Thomas expects these brokers to be happy with the plan because while the customer has no sales charge deducted from the initial investment -- like a no-load fund -- the broker gets a 4 percent insurance agent's commission on every sale.
Although there is no sales charge, there is a $30 annual administrative fee, similar to that charged by most insurance companies for any annuity they sell. There is also a 1.3 percent "asset charge," similar to a management fee.
The minimum investment is $1,500, and additions of at least $10 can be made at any time. There is no ceiling to how much can be invested each year.
Within the "wrapper" of the eight-fund variable package, Mr. Thomas explained , the investor can switch from one fund to another as often as he wishes. "He can do it every day if he likes." After retirement, switching is allowed but once a year.
Should the customer pass on before retirement, the heirs will receive 100 percent of the money invested, even if the investment might be worth less than that. If there is more than 100 percent of the principal in the fund, the heirs receive that, too.
"And this money is not subject to probate," Mr. Thomas points out, because the heirs are receiving a death benefit from an insurance company.