What is a fixed-index annuity?

I’m getting mail about an apparent dream investment. It promises gains if stocks go up, zero loss if they fall and guaranteed lifetime income, too. What’s not to like? Plenty, as it turns

out. The investment is called a fixed-index annuity, or FIA, and it’s issued by an insurance company. Sales are booming — $60.9 billion in 2016. FIA contracts vary, but this is how they

work. You buy the annuity with a lump sum, which goes into the insurer’s general fund. You are credited with a tax-deferred return that’s linked to the market — for example, to Standard

& Poor’s index of 500 stocks. If the S&P rises over 12 months, you receive some of the gain. For example, your credits might be capped at an increase of 5 percent, even if the market

soars. If stocks go down, you take no loss — instead, your FIA receives zero credit for the year. Each year’s gains or zeros yield your total investment return. But I see problems: LOW

RETURNS. Salespeople might claim that FIAs could earn 6 or 7 percent a year. But with fees, they’ll struggle to match the low returns from bonds, says Michael Kitces of the wealth management

firm Pinnacle Advisory Group in Columbia, Md. HIGH FEES. You can’t find out what you’re paying for investment management. Costs are buried in the black-box system used to adjust the credits

to your account. Sales commissions run 5 to 7 percent and may be hidden, too. Under the new fiduciary rule, which requires advisers to put your interests ahead of theirs, commissions have

to be disclosed if you’re buying the annuity for a retirement account, but not for other accounts. Salespeople sometimes claim, falsely, that their services are free. PROFIT LIMITS. Every

year, the insurer can raise or lower the amount of future gain credited to your account. You face high risk that returns will be adjusted down. POOR LIQUIDITY. You can usually withdraw 10

percent in cash, each year, without breaking your guarantee. But you’ll owe surrender charges if you need your money back before five or 10 years are up. You might also forfeit some gains.

LIFETIME BENEFITS. For about 1.5 percent a year, you can add a “guaranteed lifetime withdrawal benefit” to your FIA. Promised yearly payments run about 5 percent. But, Kitces asks, why do

it? Your basic FIA already provides a lifetime income. What’s more, 5 percent is _not_ a return on your investment. The insurer is merely paying you your own money back, in 5 percent

increments — and charging you 1.5 percent for the “service.” If you live long enough, you’ll exhaust your money and the insurer will pay, but that doesn’t happen often. For a guaranteed

income, try a plain-vanilla immediate or deferred annuity. It’s cheaper, and you’re not apt to be led astray.