American Skandia Sued Over Tax-Deferred VAs In IRAs

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A New York law firm has filed a class-action suit in U.S. district court against American Skandia Life Insurance Company, Shelton, Conn., and its affiliates, charging the company inappropriately sold tax-deferred variable annuities to individual and group retirement plans.

The lawsuit, Donovan v. American Skandia Life Assurance Corporation et al, was filed by Wolf Haldenstein Adler Freeman & Herz LLP in December in the U.S. District Court for the Southern District of New York.

The action was brought on behalf of Diane C. Donovan and an unspecified number of other investors who bought tax-deferred VAs from American Skandia for their retirement plans from Dec. 13, 1997 through Oct. 22, 2000, according to papers filed with the court.

The suit charges American Skandia violated the Securities Act of 1933 and other federal statutes by making misleading statements and omissions in promoting sales of its VAs. The alleged misstatements included an assertion that tax-deferred VAs were suitable for tax-deferred retirement accounts, Wolf Haldenstein says.

“Deferred annuities have no place in tax-deferred retirement accounts such as IRAs and 401(k)s, which already have these very same tax benefits,” the suit charges.

The law firm further alleges the company imposes fees for VAs that in total are two to three times the “normal” commission rates for other investments, such as mutual funds or securities.

“Moreover, because of the subtraction of annual management and carrying fees, calculated as a percent of total assets in the account, purchasers are deprived of up to one-third of their total account value (compared to a regular investment) over the years and are not informed that the circumstances are remote under which the insurance features for which they are paying fees would have any value.”

A spokeswoman for American Skandia says the lawsuit is similar to numerous claims filed over the past several years against a number of VA issuers. “American Skandia believes the claims to be without merit and intends to defend the case vigorously,” the spokeswoman says.

Charges that tax-deferred products are unsuitably sold to retirement plans are not uncommon, observes a professor familiar with legal issues involving VAs. Their merit depends on how the insurer or its representatives sold the product, says John P. Huggard, finance professor with North Carolina State University in Raleigh.

“If the only reason you are [selling it as part of a retirement plan] is for tax deferral, thats clearly inappropriate,” Huggard says. “At the same time, if a VA offers some significant benefit beyond what the investor might get from another investment, then its acceptable.”

Huggard points out, for example, that Merrill Lynch & Company recently rolled out an annuity specifically aimed at the IRA market.

“They are clearly a large financial entity and going after that money with the idea that this annuity is well suited. They make it clear that the annuity is not appropriate if the only thing that matters is tax deferral. But if the investor is looking for a death benefit or a living benefit or something like that, its appropriate.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 13, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.