Annuities can be long-term solution: experts and study show, though currently viewed as a poor investment choice, annuities can protect retirees from the bite of a bear market. (Annuity Conference: Life/Health).

Financial advisers and product manufacturers often tout the merits of dollar-cost averaging while accumulating assets. Even in bear markets, investors can take comfort in knowing they are buying shares at low prices that may turn into higher values in the future.

In retirement, however, management of finances is not as easy as periodic withdrawals--the opposite of dollar-cost averaging. That's because redeeming shares at low prices can deplete assets too rapidly. And if that happens at the beginning of a retirement--as is the case for those who retired three years ago-the results can be catastrophic. "A bear market in the early years will self-destruct a plan;' said David Zander, a certified financial planner with Lincoln National Life Insurance Co. and a speaker at the sixth annual Annuity Conference sponsored by Limra International, the Life Office Management Association and the Society of Actuaries.

According to a study by Ibbotson Associates, an investor starting in 1972 to withdraw at a rate of 9% a year from a portfolio of 60% large-company stocks and 40% intermediate-term bonds would have gone broke in 1981. The portfolio would have lasted to 1983 at a 7% withdrawal rate and to 1993 at a 5% withdrawal rate. Had the person retired in 1982, when the 18-year secular bull market in stocks and bonds began, the portfolio would have flourished.

As Zander and fellow presenters pointed out, annuities are the only financial product that can avoid the devastation a bear market can wreak early in retirement, and that can keep on paying no matter how long the investor lives. But annuitization has a bad reputation and is chosen infrequently.

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RELATED ARTICLE: New Products Compete With Tax-Advantaged Annuities

Just a few years ago, annuities had barely any competition among nonqualified products. But today, 529 college savings plans and separately managed accounts are making inroads on annuities in the market for tax-advantaged products funded with already taxed dollars, and they are dominated by major stock brokerages and mutual funds.

Though sold in 50 states and the District of Columbia, the assets of 529 plans are still tiny compared with those of annuities. According to Tricia 1. Brady of American Skandia Life Insurance Co., 529 plans held less than $15 billion at the end of last year in 2.8 million accounts. By contrast, fixed and variable annuities attracted more than $200 billion in premiums last year alone. Brady was a speaker at the sixth annual Annuity Conference.

Separately managed accounts, however, are a different story. Speaker Marc Costantini of Manulife Financial said the industry last year topped $1 trillion in assets under management and expects to have $1.4 trillion by 2005 and $3 trillion to $5 trillion by 2010. Variable annuities currently have less than $1 trillion in assets under management.

Firms have long offered personal brokerage services to wealthy individuals with at least $250,000 to invest. But with the improvement in software technology, brokers in recent years have been able to offer the same customized services to people opening an account with a minimum of $100,000. As a result, sales of separately managed accounts have taken off.

Costantini said a typical managedaccount portfolio may hold 30 to 40 securities. While it does not offer tax deferral, managers can keep the portfolio tax efficient by keeping transactions to a minimum.

The 529 plans, created by Congress in 1996, have a much more narrow objective: to fund the college educations of children. Industry sources predict that assets could reach $100 billion by 2005 and $380 billion by 2010.

Annuities offer some advantages over 529s and separately managed accounts in the form of up to $300,000 per beneficiary, said Brady. Anyone may contribute to a plan, not just parents, so it could become fully funded in one year, but the average plan size today is about $5,600. Some states offer tax deductions on contributions.

Full-Service Brokers to Lead Growth of Annuity Sales

Full-service brokerage firms are expected to increase their sales of annuities in the next five years above historical rates, while sales by career life insurance agents and independent life agents will decline, according to a survey by Limra International and McKinsey & Co.

Independent financial advisers and planners will increase their sales at historical rates, while banks and discount brokers are expected to continue to improve their annuity sales at their historically modest 3% to 4% per year. The survey also anticipates that sales by independent broker dealers will decline.

The surveys findings were presented by McKinsey's Robert Ball and Limra's Lucian J. Lombarcli at Limra's sixth annual Annuity Conference.

Recent distribution trends have been for growth in third-party outlets that consult with clients rather than transact sales. These parties have also excelled at servicing accounts, particularly variable annuities that have become much more complex in recent years. Lombardi said that servicing accounts is now considered part of effective distribution and helps differentiate product manufacturers.

Banks and independent life agents have led the way in fixed-annuity sales in recent years, while those licensed in securities sell the variable products and reach wealthier clienteleuthose with household incomes of $100,000 or more. Bank representatives reach clientele with an average age of 31 and average household incomes of $60,000. Securities brokers sell annuities averaging some $63,000 in value.