Buyer Beware - Complex Annuities
Wednesday, March 13, 2013 • 4:08pm
Do you own an annuity -- or have you been approached about buying one? Be aware that annuities are under increasing scrutiny, with the State of Florida leading the charge. Florida put suitability standards on the books in January 2011 to protect its senior citizens from fraudulent annuity sales that are unsuitable for a person’s age or economic status. Florida now is considering extending these protections to Floridians of all ages. It seems to be working since annuity sales complaints in Florida have declined since January 2011.
Here’s an example of an unsuitable annuity sales attempt close to home: one of my relatives (now age 83). This relative lives out of state (not Florida). A financial advisor tried to pitch an annuity to her when she was 79. Fortunately she turned to me for a 2nd opinion and I recommended she stop taking calls from this advisor. Why? The fine print on this annuity proposal indicated underlying expenses were over 3% per year and the money would be locked up for 10 years until she was 89 – otherwise she would incur stiff surrender penalties. Did my relative need this annuity? Absolutely not. The advisor, however, needed the commission and was annoyed when my relative said “no thanks.”
Having a stream of income in retirement (like Social Security) can offer significant benefits over tapping a lump sum in retirement. The theory is good and the practice is fine if an annuity is needed and delivers in a transparent and low cost manner. An example is fixed annuities - esp. if purchased when interest rates are relatively high. However, consumer advocates can be critical of complex variable annuities. But don’t take my word for it – here’s what Barbara Roper (Director of Investor Protection at the Consumer Federation of America)* has to say about “complex annuities”:
1. They’re unnecessarily sold with IRA money. Roper observes “A huge percentage of annuities…actually are held inside tax-advantaged retirement accounts, so you’re buying a product whose primary benefits are tax-advantages inside a plan that already provides those tax advantages.” (this is what I call “a refrigerator inside a refrigerator”). Roper points out that the SEC has deemed this “not appropriate” [for a retirement product].
2. They’re too complex. Roper says “When you buy an investment, they say you shouldn’t buy it unless you understand what would have to happen to you to make money and lose money…too often annuities – at least the more complex exotic annuities […] fail that test.” Roper says it’s extremely difficult to compare annuity products since they have different features. Withdrawal penalties, for example, often are presented in the form of an equation instead of disclosing dollar amounts of surrender penalty losses.
3. Fees are high, disclosure is not transparent. According to Roper, “The complexity, the less-than-transparent disclosures about key features, the very high costs associated with these products make them highly suspect….”
4. Salespeople plugging them can put their interests before yours. Roper observes “…they’re [annuities] disproportionately sold by salespeople who don’t have to act in your best interests…[annuities] compete based on paying the salesperson. That to me is a market I want to avoid.”
What should you do if you own an annuity? If your annuity is non-qualified (purchased with after-tax money), a fee-only advisor can provider an objective assessment of a product. It may be possible to roll this annuity over to a far less expensive annuity. If your annuity is qualified (in a tax-deferred account – e.g. an IRA), it may be dismantled altogether if it serves no purpose and is out of surrender penalty.
*Roper was quoted in an article by Marlene Y. Satter titled “Complex Annuities” in “Investment Advisor” March 2013, page 24.
Eve Kaplan is a Fee-Only (no products sold) Certified Financial Planner® Practitioner with 29+ years of investment/planning experience. Eve is proud to be a Fee-Only planner because she upholds the highest Fiduciary standards in the planning industry. Eve opened Kaplan Financial Advisors in Berkeley Heights in 2004. Prior to that, she spent 20 years working as an equities analyst and fund manager in NY, Tokyo, Singapore and Rotterdam. Kaplan Financial Advisors provides comprehensive planning/investment management services to high net worth individuals. Her firm also provides high-quality, low-cost 401(k) and 403(b) plans. Eve can be reached at 908-898-0549 or Eve@KaplanFinancialAdvisors.com. Visit her website at www.KaplanFinancialAdvisors.com
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