The debate in the market place for years is should retiree’s put their retirement funds in an annuity or in the marketplace? The arguments for not putting money in an annuity, using a company 401(k) market fund to “grow” the asset to ensure a hedge against inflation and of course avoid what is presented as those pesky high fees that are said to accompany an annuity.

More and more we are now reading of horror stories of retirees suffering as their 401(k) rollover enriches brokers while leaving the consumer with less and less of their original balance. A recent story in Bloomberg titled “Retirees Suffer as 401(k) Rollover Boom Enriches Brokers” highlights what looks like a growing trend. The article tells stories of people like Kathleen Tarr who was viewed by AT&T Inc. (T) employees as “their de facto 401(k) expert.” They followed her advice after her visits to their homes and offices where she reviewed their retirement plans as they called up balances on computer screens.

Tarr, in actuality worked for Royal Alliance Associates, a brokerage firm owned by insurer American International Group Inc., (AIG) according to the Bloomberg article. The article states Tarr and her business partner reaped hundreds of thousands of dollars a year in commissions and trips to the Bahamas and Florida resorts. During this time the article says 37 of their clients filed complaints against her, referencing the Financial Industry Regulatory Authority.

Some clients like Maria Lew, a former AT&T administrative assistant saw her balance fall from $390k to $100k, resulting in days where she “go to sleep and I can’t stop thinking about it.”

The Bloomberg article outlines the process where retirees are contacted via a cold call when they leave their savings in 401(k) plans and financial firms “entice them with cold calls, internet ads, storefront signs and cash incentives to switch to IRA’s.”

You can read the article and make your own determination. However, I find some irony in the widely covered Glenn Neasham case out of California. You might remember Glenn Neasham received a referral from an existing client. He met with Fran Schuber on more than one occasion, he completed a carrier-approved fact finder, suitability and other forms and an annuity contract. He then submitted the state approved application along with the required suitability forms, and Fran Schuber’s check, to Allianz, which reviewed the paperwork, determined Fran Schuber’s suitability, in compliance with state law and industry practice, and issued the policy.

Glenn Neasham helped Fran Schuber reposition $175,000 in funds she had in a CD account with the Savings Bank of Mendocino into a MasterDex 10, with an average 8 percent in equity options, at the time. It offered 10 percent free withdrawals, providing ample liquidity for Fran Schuber’s situation, policy loan provisions and a 10 percent bonus paid up front on any premiums added, anytime in the first five policy years.

Glenn NeashamOn Neasham:

(You can read more about his case in an article written Nov, 2013) Fran Schuber had enough liquidity to meet her needs in the form of $100,000 in other accounts along with $17,500 per year for at least five years.

So, what irony am I talking about? In the Bloomberg article 37 complaints were filed against Tarr by her clients. A three-month Bloomberg investigation found that former employees at major companies such as Palo Alto, California-based Hewlett-Packard (HPQ) Co. and United Parcel Service Inc., as well as AT&T, have complained that sales representatives lured them into rolling over their 401(k) nest eggs into unsuitable IRA investments. Bloomberg found that these paid higher fees in the brokerage accounts than they would have in their AT&T plan. The investigation was based on interviews with retirees and brokers, confidential arbitration records and other documents.

The 37 complaints are still unresolved while on Dec. 6, 2010, Lake County (California) District Attorney John Hopkins signed a criminal complaint charging Glenn Neasham with “committed theft and embezzlement – financial abuse – with respect to an elder and dependent (sic) adult.” On Oct. 23, 2011 Glenn Neasham was found guilty by a 12-person jury of a single count of felony theft, for selling an annuity to an elderly woman.

The contrast between the experiences of the retiree’s in the Bloomberg article and the Neasham case are sticking, at least to me. Glenn Neasham appealed his conviction and recently the Court of Appeal of the State of California – First Appellate District, Division Three in a decision written by Justice Stuart Pollak found:

“Theft is a specific intent crime requiring the intent to steal. By permitting the jury to find defendant guilty if it found that the annuity deprived Schuber of a significant portion of the value or enjoyment of the funds with which she purchased it, regardless of whether the defendant considered the annuity to increase the value of her holdings and had no intention to deprive her of anything, the [trial] court prejudicially erred. Indeed, it is doubtful whether one who gives equal value in exchange for property received can ever be found to have intended to steal the property received. Defendant’s conviction must be reversed.”

Fran Schuber’s $175,000 went directly to Allianz and by the time Glenn Neasham came to trial, Fran Schuber’s policy value had grown to some $220,000. Moreover, Allianz did not use or take any of Fran Schuber’s funds to pay Glenn Neasham’s commission. That was paid directly from Allianz’s general funds, as is industry practice.

In the current interest and market conditions you hear some professionals moving away from typical negatives about annuities and my position has always been that the right vehicle for your client is the one that meets their needs, now and in the future. Having retirement funds in the marketplace has its place for clients as does having some of their nest egg in the right annuity. The alternate closing question I have presented to advisors for years is as appropriate in today’s market as it has always been – “of the money you have left, how much do you not want to risk, so you can be more confident in the investments you do make?”

IronyThe Bloomberg Irony

In looking at the benefits different features of an annuity bring your client compared to the experience of people such as those illustrated in this Bloomberg article let’s not forget the basics about annuities:

How can they protect their assets?

  • Problem: How can your client increase their income without decreasing the safety of their investment?
  • Suitable Solution: We are all familiar with the old saying “Don’t put all your eggs in one basket.” Suitable diversification of assets in an annuity could add to the safety of your client’s portfolio.

Bond losses

  • Problem: They invested in bonds to protect their savings and receive regular interest income. They didn’t realize that when interest rates increase, the value of their bond principal would decrease.
  • Suitable Solution: With a bonus annuity, it may be possible to increase your client’s principal immediately, thus helping them recover losses on their bond portfolio and protecting 100 percent of their future principal. 

Locking in stock market gains

  • Problem: Lately, market investments have performed well. They are concerned that the market won’t continue its upward trend forever.
  • Suitable Solution: To offset the effects of inflation, an annuity could offer potentially higher benefits because of compound interest.

How can they make sure their money will be available when they need it?

Liquidity: “Can I get some of their money out without paying penalties or charges?”

  • Problem: Many financial accounts charge penalties for withdrawals before maturity on the entire account value. But consumers may want to be able to withdraw some money when they need it without paying excessive penalties or losing up to six month’s interest.
  • Suitable Solution: Annuities have many guaranteed flexible withdrawal options that may allow them to take money out of their account without paying any penalties or charges. They could receive free withdrawals that may be tailored to meet their financial situation.

ReduceHow can they reduce their expenses?

Federal income taxes

  • Problem: Interest income earned on checking accounts, savings accounts, CDs, stock mutual funds, bond mutual funds (except for special tax-free funds), T-bills, and dividends on common stock may all be taxable by the federal government each year when interest is credited…even if they don’t take it out!
  • Suitable Solution: Interest income credited to their annuity is not currently taxable by the federal government. They may not pay taxes on their annuity interest income until they take it out of their annuity, but usually at lower income tax rates.

Investment effects on Social Security benefits

  • Problem: Interest income earned and credited on most investments such as mutual funds, savings accounts, CDs, bonds, etc. may be reportable as income, which may increase their income tax on Social Security.
  • Suitable Solution: Interest income earned and credited on an annuity usually is not subject to either federal or state income taxes until taken out of the annuities. Such interest income is tax-sheltered and authorized by the Internal Revenue Code. When they finally take their money out of their annuity, depending upon the income option they choose, up to 85 percent of their monthly income may not be subject to any income taxes. Thus, fewer taxes will be paid and more of their Social Security income benefits could come through to them.

Charges & fees

Problem: Many financial investments and financial accounts charge administrative, sales or investment fees as a percentage of total assets. Often state premium taxes are passed on to your client.

Suitable Solution: Subject to distribution requirements, most annuities have:

  • No sales charges,
  • No monthly administrative fees
  • No state premium taxes passed on to your prospect, and
  • No investment fees

How can they increase their income?

  • Problem: Their interest income, after paying income taxes, is not enough to meet the increasing costs of living. They need to increase their monthly interest income without adding any investment risk.
  • Suitable Solution: With an annuity, it is possible to increase their after-tax income for either more monthly income right now – or more monthly income starting at some later date they pick – and lasting for their lifetime and beyond. With an annuity, there may be no market risk. Their money is safe, so they can count on the return of 100 percent of their money, in addition to a return on their money.

transfer costsTransfer costs

  • Problem: You client understands he or she may be able to increase their current income or the tax-deferred growth of their assets by transferring some of their CDs, mutual funds, money markets, stocks, etc. into annuities, but they do not want to incur the transfer cost involved in such transaction.
  • Suitable Solution: With some suitable annuities, it may be possible to increase their principal immediately, which will help recover transfer costs.
  • How can they guarantee their monthly income and their principal?

Guaranteed retirement income

Problem: They want three guarantees for their retirement income:

  1. Their monthly income checks must stay the same every month – never decreasing when interest rates decline.
  2. Their monthly income checks must keep coming to them for their entire life – no matter how long they live.
  3. Many investments they have looked at – or have their money in – may not give them these two financial guarantees.

Suitable Solution: Annuity guarantees

  • Their monthly income checks can be the same every month. Their income will never decrease just because interest rates go down.
  • Their monthly income checks will be there forever. With a life income option, their money will never run out. And if they die early, their annuity will continue the same monthly income checks to whomever they name for the balance of a minimum guaranteed period, which they predetermine.

Safety of principal

  • Problem: Many investments do not guarantee that their principal will never be less than their original investment.
  • Suitable Solution: Unlike other financial products, suitable annuities can guarantee that their principal will never be exposed to market risk.
  • Their policy values don’t have to go down because of market fluctuations – they may only go up as their guaranteed interest is credited each month, until they take their income payout.

How can they make sure their heirs will be protected in case of their premature death?

  • Problem: Probate administrative costs and fees can average 8 percent to 10 percent of assets. Their assets are not available to their heirs until their estate is approved by probate court if they don’t have a will. Average time many assets remain tied up in probate court can be one to two years. Without a will, all records of their assets are available to the general public. The court, in absence of a will, transfers their money to those family members as directed by law.
  • Suitable Solutions: A suitable annuity, with a properly designated beneficiary other than their estate, can bypass probate and eliminate all probate administrative costs, fees, delay and publicity. Therefore, at their death, more of their money can go to those family members they choose. A suitable life insurance policy bypasses probate and delivers tax-free insurance.