Choosing an annuity will be one of the most important decisions you make leading up to or during retirement. A good annuity will provide reliable income for life, and in the unfortunate event that you pass before you’ve exhausted your benefits, your beneficiaries will receive a lump sum payment to help with final expenses. If you’ve been researching annuities, you’ve probably run across John Hancock.
Founded in 1862, John Hancock remained a U.S. corporation until the Canadian company Manulife Financial acquired it in 2004. The past decade hasn’t been kind to the company, but even more alarming than the global economic downturn is the company’s slew of bad press concerning its annuity business.
A Strong Foundation
Because it’s now owned by a Canadian company, John Hancock changed a few things about the way it conducts business. According to Kerry Pechter in ThinkAdvisor, Canadian companies are under stricter accounting standards than U.S. companies, so it’s no surprise that these two companies came under pressure to do something.” Prior to the merger, John Hancock might have used accounting tricks to compensate for falling interest rates and low returns, but annuity policy holders can now rest assured that the company has sufficient cash reserves to actually pay its annuities.
Of course, the irony that an insurance company of all businesses requires such a guarantee in the first place is not lost on us. After all, the global recession continues to linger in many parts of the world and even in some economic sectors here at home, and that was largely caused by risky lending practices. Annuities aren’t all that different from real estate in that your financial security is at stake.
Paying for Performance
What’s one-half of one percent? The average person will say not much, but any reputable retirement planner will immediately answer that it can mean the difference between living the retirement of your dreams and barely scraping by.
Let’s compare two annuities that both return about four percent each year. You invest $100,000 into each. The first is a Vanguard product that has a mere 0.5 percent annual fee and almost no other fees to speak of. If you withdraw $500 a month, the annuity will last approximately 25 years and net you a total of $150,000.
A similar John Hancock annuity might have an annual fee of 1.25 percent. Some plans also come with high upfront costs. Scott Woolley points out in Forbes that a particularly egregious “John Hancock group annuity contract allows it to skim off up to 5 percent of assets before the remains go to work for savers. That’s on top of “trailer” commissions of up to 1.4 percent of assets annually for as long as the plan exists and “asset charges” of up to 4 percent.” Your $100,000 investment now only doles out $500 monthly payments for 20 years instead of 25 and ultimately totals $120,000. That’s $30,000 you’ve just flushed down the drain.
It’s scary to think that the money you’ve invested isn’t 100 percent safe, but right now, there is a substantial lack of public trust in John Hancock, and it has nothing at all to do with what’s happening in the global economy at large. According to Todd Wallack of The Boston Globe, a recent “lawsuit, filed in federal court, alleges that the Boston insurer routinely consulted the Social Security Administration’s master death list to check whether annuity holders had died so it could halt the payments immediately. But John Hancock failed to routinely use the same database to check if life insurance policy holders had died so the company could promptly pay beneficiaries.” If you want to rest assured that you or your loved ones will be able to access your money as needed, you may want to look somewhere else.