A reader recently attended their first retirement seminar — drawn in, as many are, by a free steak dinner — and left with a question that tends to follow these events: the presenter said annuities can outperform the stock market with no risk of loss. Is that true?

The short answer, according to regulators and financial columnists, is no — at least not in the way it is pitched. As MarketWatch's Quentin Fottrell put it in the column that prompted the question, fixed and fixed-indexed annuities are "unlikely to outperform the historical 8%-10% annual returns of the market". This is education, not investment advice; the views below are attributed to named experts and regulators.

What an annuity actually is

An annuity is a contract with an insurance company. You hand over money — either a lump sum or over time — and in exchange the insurer promises future payments, often a guaranteed income stream in retirement. There are three main types:

  • Fixed annuities pay a set interest rate regardless of what markets do. You know in advance how the account grows and what it pays.
  • Variable annuities put your money into investment subaccounts that resemble mutual funds. Returns rise and fall with markets, you bear the loss risk, and they tend to carry higher fees.
  • Fixed-indexed annuities, also called equity-indexed annuities, are the ones usually featured at these seminars. Your return is tied to a market index such as the S&P 500, with a floor that protects principal from loss — but with strict limits on the upside.

How the 'outperform the market' claim breaks down

The pitch leans on a real feature: in a down year, an indexed annuity's floor can keep you from losing money. The catch is what you give up for that protection. The U.S. Securities and Exchange Commission and FINRA spell out the specific limits in plain terms:

  • Caps put a ceiling on your return. If the index rises 12% but your cap is 7%, you get 7%, the SEC explains.
  • Participation rates give you only a slice of the index's gain — often well under 100%. A 75% participation rate on a 10% gain credits you 7.5%.
  • Spreads or fees are subtracted from the index gain before it is credited.
  • Surrender charges apply if you withdraw early, typically within the first six to 10 years, and can eat into principal plus trigger tax penalties.

FINRA, the brokerage-industry regulator, calls indexed annuities "complex" products and warns that "the rate of return for an indexed annuity doesn't fully match the positive rate of return of the index to which the annuity is linked — and could be significantly less".

The cherry-picked chart

Fottrell flagged a common sleight of hand: the seminar presenter started his market chart in 1998, conveniently skipping the long bull market of the past decade-plus, when stocks would have easily outperformed most fixed-rate annuities. Choose the right start date and almost any product can be made to look like a winner. There is also the question of who pays for the steak: a free, expensive meal usually signals sizable sales commissions built into the product.

The balanced takeaway

None of this means annuities are a scam. For retirees who want a predictable, guaranteed income they cannot outlive — and who do not want the stomach-churn of market swings — an annuity can fit. Regulators stress that indexed annuities are intended as long-term holdings and that suitability depends on the specific mix of caps, participation rates, fees and surrender terms in a given contract.

What the products generally are not is a way to beat the S&P 500. Read the contract, ask how the agent is paid, and treat any "no risk, market-beating returns" promise as the red flag regulators say it is.