Article On The Abuse Of 412(i) Plans Hits A Nerve
To The Editor:
Thank you for printing an article on the concerns regarding the abuses that are taking place in the 412(i) defined-benefit arena. I know Tom Higgins well and respect his expertise in the pension market. His article in the May 5 issue on the 412 plan is right on the money.
I have been presenting the 412 plans to qualified clients now for the last couple years since the changes with EGTRRA in 2001. My biggest concern for these plans has been the way they have been presented by uninformed or greedy advisors. I am fully aware of the law firm Tom refers to in his article. Not only are they aggressively promoting the plan, but they are selling plans that are heavily loaded and strictly commission-driven.
These are not individuals who are in the insurance business for a career but only for the short term to abuse a plan that allows larger contributions for smaller groups. They are the ones that will ruin the plans for those advisors who are designing them according to the Internal Revenue Service qualifications. It irritates the heck out of me when a group of people will take a good plan like the 412 and look for opportunities to abuse it for their own quick greed. I can assure you that they will be “out of the business” within three to five years, assuming they were ever in our business.
The 412 plans are designed for a relatively small group to participate for an extended period of time until retirement or until the plan is fully funded. There are distinct advantages to funding these plans at a level less than the maximum. There are several reasons that benefit the client but also for the obvious reasons the IRS allows these plans in the first place.
Also, life insurance is a very important component of the plan, but I have yet to see the need for a plan to use the maximum amount of life insurance. The abuses of short-term funded plans with “springing” cash values after five years that are maximum funded through the life insurance is a recipe for disaster. When the IRS and Treasury officials audit these plans, these so-called advisors from the law firm will need all of their legal expertise to defend themselves. The insurance advisors that have taken the advice from this firm will also be under the same microscope and will be left to defend their own greed.
I encourage those who are marketing the 412 plans to their clients to do so in a way that is not abusive. The 412(i) plan is a great plan when done according to the design from the IRS.
On the more positive side, I have worked with several advisors across the country who are designing these plans exactly according to the 412(i) code. However, we all know that negative news attracts the most attention. My compliments again to your magazine for printing a fine article by a man who knows and understands these plans. Our industry is now better informed.
Robert G. Dye Sr., CLU
Reproduced from National Underwriter Life & Health/Financial Services Edition, May 26, 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.