Saving for Retirement Is Complex

It seems retirement saving just gets more and more complex. Firms continue to come up with new products to sell to people saving for retirement.


By Briton Ryle

I received a question from Wealth Daily reader Garland W.:

What can you tell us about Structured Capital Strategies (
Wealth adviser ask me to look at:
A) Structured investment option
B) Variable investment option

Seems to be something that allows you protection with an upside and downside margin.
Please comment.

It seems retirement saving just gets more and more complex. Firms continue to come up with new products to sell to people saving for retirement.

Before I get into the nitty-gritty here, please understand that I use the words “product” and “sell” deliberately. Because this isn’t a case where you’re putting your money with a manager whose job is to grow it over time. With annuities (and a Structured Capital Strategy is a type of annuity), you are buying a product. And the company is trying to make money from selling the product.

Now, any time a company is selling a product, it’s going to try to make it sound as good as possible. This is Marketing 101.

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And please note that annuities are sold by insurance companies. And I think we all know the insurance company business model: They take in money on the promise of some sort of payment in the future. Their goal is to invest in that money and make more on it than they will have to pay out.

So when you buy car insurance, you give them a steady stream of cash that they invest. Insurance companies are very good with statistics. They know exactly what the probabilities are that you will get in a wreck.

These probabilities don’t really change. So they know what their potential liabilities are. And they know what they can make by investing in bonds. All they have to do is make sure their investment returns more than they pay out, and they make money.

Warren Buffett’s first investment was a textile company called Berkshire Hathaway in 1965. Two years later he bought an insurance company. In the mid-1990s, he bought GEICO.

Buffett loves insurance because, as he’s said, the “cost of capital is practically zero.” As I said earlier, insurance companies take in money for the promise that they will pay it out again later. Then they invest that money, all the while taking in more money.

Buffett’s big secret is that he used the cash coming in to buy more businesses, instead of simply buying Treasury bonds like most insurance companies do. Insurance premiums from policyholders have provided a steady stream of investment capital that has helped Buffett build an empire.

Anyway, enough with the history lesson…

Is It Right for You? 

My point in explaining all this is so we can be perfectly clear that an annuity, or a Structured Capital Strategy, is basically no different than any insurance policy. The people who will sell you these products are not economists, or stock analysts, or fund managers. They might be Registered Investment Advisors, which means they act as fiduciaries, obligated to put your interests above their own.

But they may simply be wealth advisors, which is just another way of saying broker or salesman. These folks are NOT required to place your interests above their own. They can basically sell you whatever they can convince you to buy. I strongly advise you to find out whether you are talking to a fiduciary or a salesman. Google the name, or ask the individual directly. You might save yourself a bundle in commissions.

I know, nearly 600 words and I haven’t even scratched the surface of what a Structured Capital Strategy is. So let’s get to that…

A Structured Capital Strategy is a type of annuity that promises you some stock market exposure, while at the same time offering you some guaranteed protection against losses. We hear this and we think, “Oh great, I get the upside, but not the downside! Sign me up!”

Of course, it’s not that simple. Two things to cover here: the upside/downside provisions, and exactly what stock market exposure means.

When we hear “stock market exposure,” we tend to think that some or all of the money is invested into actual stocks. That is not what’s going on here. With a Structured Capital Strategy, your money is put into various investments that seek to replicate a benchmark that the insurance company also creates. It’s a little like indexing. So, you can link your performance to gold. Or to the S&P 500. Or small-cap stocks or oil.

I know, it sounds misleading and complicated. But it’s not really that big of a deal. If the S&P 500 goes up 10%, and their benchmark goes up 9.5%, it’s hard to get too upset about that.

The bigger issue is how the upside potential and downside protection work…

Give a Little, Get a Little 

With a Structured Capital Strategy, you get to choose, or structure, how you want your protection and upside to be. And here’s the thing: to get more upside potential, you have to give up downside protection. And vice versa.

Now, some of these Structured Capital Strategy products will offer you downside protection of 10%, 20%, or 30%. Say you take 30%. The benchmark you choose to track falls 30%. You lose nothing. You get all your principle back when the annuity matures. But if you choose the max downside protection, you certainly aren’t going to be allowed to take the max upside, too. You have to give something to get something.

So let’s say that, along with the 30% downside protection, you’re only allowed to get 10% upside. If whatever your benchmark is goes up 8%, you get the 8%. If you’re benchmark goes up 20%, you’re capped at 10%.

So far so good, right? 10% is pretty good. 30% downside protection is really good…

Unfortunately, we haven’t talked about time yet. And time happens to always be the single most important aspect of any investment. The insurance company knows this. You need to know it, too…

I checked out the AXA website and read up on their Structured Capital Strategy products. Let’s have a look at some fine print:

Keep in mind, once your money is invested in a segment, you cannot transfer from the segment into another investment option until segment maturity.

The segment start date is also the same day the segment’s performance cap rate is set by AXA. The performance cap rate is the ceiling on the segment’s rate of return. For example, if the index rate of return is 22% and the performance cap rate is 20%, your actual segment rate of return would be 20%.

Because the performance cap rate will not be known until your money is transferred into a segment, which means you will not know in advance the upper limit on the return, you may set a performance cap threshold. Simply stated, the performance cap threshold is the minimum cap you require of a segment before investing in it. If your performance cap threshold is higher than the segment’s performance cap rate, your money will continue to be held in the segment type holding account until it is met or the entire account value is transferred out of the Segment Type Holding Account.

Segment means the same thing as benchmark. But please note: once your money is in one of these segments, you cannot move it to another segment. You can withdraw it, and there will be penalties. But you can’t move it. So if you’re in the S&P 500 (NYSEARCA:SPY) and the market tanks, you suck it up or pay the penalty.

I don’t really like that. If you simply own an index fund, you can buy or sell it whenever you want. Still, there’s an even bigger problem…

Is Time on Your Side?

So, that fine print is pretty tricky. AXA offers Structured Capital Strategy products in one-year, three-year, and five-year time frames. You can choose your downside protection, but you don’t know what the upside is until your money is in there. That’s kind of crappy. So is the blind auction of setting your performance cap and then finding out later which segment/benchmark your money went into.

Let’s assume a best-case scenario, where you get into the five-year S&P 500 benchmark. You take your 30% protection, and they give you a 20% performance cap. I think it’s highly unlikely that you’d get 20% while also being protected from 30% losses, but what the heck, this is an example.

That’s a solid 20% gain — over five years. You know what that works out to? 4.4% a year. That’s really not so great. Especially when you consider that a simple S&P 500 index fund averages about twice that. And even more so when you consider how well stocks have performed since 2009. (Of course, just because stocks have done so well doesn’t mean they will continue to do well. My point is, there is opportunity cost if you’re locked in at 4.4%, when you could be making 10%, and, well, that hurts.)

Now, I understand that the downside protection is an attractive feature. Nobody wants to lose money. And if you’re already retired, it’s even more important. And it’s for that reason that I can’t tell you to simply avoid this type of investment product. It would be irresponsible of me to advise you on your investment decisions without knowing the whole story.

My point with all this has been to sift through the marketing language and get to the meat of what a Structured Capital Strategy product really is, and why insurance companies created them.

On a personal level, I will tell you that I prefer index funds and dividend funds because of the flexibility they give you. I do not like the idea of having my money basically stuck with one company for five years. I am also not clear on what the fees for Structured Capital Strategy products are. This is also a huge concern. If you can only earn 4.4% a year, and fees are 1%, you’re barely beating inflation.

I hope this discussion has helped. Please feel free to send additional questions to Angel customer service if you have them.