From the U.S. Government Accountability Office, www.gao.gov Transcript for: Risks and Benefits of Annuities with Guaranteed Lifetime Withdrawals Description: Audio interview by GAO staff with Alicia Puente Cackley, Director, Financial Markets and Community Investment Related GAO Work: GAO-13-75: RETIREMENT SECURITY: Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies across States Released: January 2013 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's January 2013. Facing rising healthcare costs and inflation, retired Americans are at increasing risk of outliving their assets. To help ensure income throughout their retirement, some people invest in annuities, with guaranteed lifetime withdrawal benefits. A group led by Alicia Puente Cackley, a director in GAO's Financial Markets and Community Investment team, recently reviewed two such annuity products, focusing on their implications for consumers and insurers, and the government's efforts to regulate them. GAO's Sarah Kaczmarek sat down with Alicia to talk about what they found. [ Sarah Kaczmarek: ] What are annuities with guaranteed lifetime withdrawals? [ Alicia Puente Cackley: ] Well first of all, an annuity is an insurance contract that allows a consumer to accumulate money for retirement, and then it guarantees that a lifetime income after some specific date that they choose. So a guaranteed annuity with lifetime withdrawal is a feature that provides consumers with the ability to take payments from the amount that they have accumulated—the amount that they've invested, so that they have access to their money, even as they're trying to save for retirement. And then they still have a guaranteed payment once they do start taking their annuity. [ Sarah Kaczmarek: ] And can you talk about the two types you compared for this report? [ Alicia Puente Cackley: ] We compared two products. One is called a variable annuity with guaranteed lifetime withdrawal benefit features, or VAGLWBs, and the other is called a contingent-deferred annuity, or CDA. And the two products have some features in common. They both deal with consumers' desire to reduce their risk of outliving their income and retirement. On the other hand, there are some differences between the two products. With VAGLWBs, your assets are held by the insurer, whereas with CDAs you're investing in your own account—you have your own brokerage account or IRA, and the insurance company is guaranteeing that you will take a—be able to take a certain amount of money out of the account over time. [ Sarah Kaczmarek: ] One of the things you looked at was risks and benefits to consumers. Can you talk about that? [ Alicia Puente Cackley: ] There are a couple of different things that matter for—in terms of the risks that consumers face when they purchase either VAGLWBs or CDAs. First of all, these are very complex products. There are differences about—in terms of the fees that you pay, there are differences in terms of the benefits that you get, and they aren't easy to compare. So one of the risks is just making a bad decision about what product you buy, and it's not something that there—that you can necessarily figure out on your own. It's important to work with a financial professional, an investment advisor, someone from a brokerage firm, whoever you normally would look to for financial advice. [ Sarah Kaczmarek: ] Your team also looked at the extent to which regulations addressed these risks to consumers. What did you find there? [ Alicia Puente Cackley: ] What we found is that there's some differences between VAGLWBs and CDAs in terms of how they're regulated. VAGLWBs are considered both to be a security, and so they're—that’s regulated at the federal level by the SEC, and then they're also an insurance product, so they're regulated by state insurance regulators in every state where they're sold. CDAs are new products, and the application of federal law isn't well developed. If they aren't subject to federal law, they're still subject to state insurance laws. The risk is that every state may insure these products differently. Some states have more regulations on the books than others, and so a consumer in one state who purchases a CDA for example, may be more protected than a consumer in another state. [ Sarah Kaczmarek: ] Finally, for consumers who are concerned about the potential risk to their retirement security, what's the bottom line here? [ Alicia Puente Cackley: ] The bottom line is that these are products that can be of benefit, but they are very complex, they are not something that you should purchase on a whim. It's important to seek advice, and it's important to understand exactly what you're purchasing, and it's important to know for the state that you live in how well they're regulated. [ Background Music ] [ Narrator: ] To learn more, visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the congressional Watchdog, the U.S. Government Accountability Office.