Stopping The Deceptive Sales of Annuities
Thursday, April 29, 1999
NEW YORK Might something actually stop the deceptive sales of tax-deferred annuities? I'm speaking of selling them as investments for IRAs and other tax-deferred retirement accounts.
Nearly 55 percent of the sales of variable annuities were to retirement plans in 1997 (the latest data available), according to the Life Insurance Marketing Research Association in Windsor, Conn.
But that's not where annuities belong, says Stephen Butler, president of Pension Dynamics, a pension consulting firm in Lafayette, Calif.
When you buy an annuity for a retirement plan, you're paying for tax deferral that you don't need. But a salesperson may persuade you otherwise.
Mis-sold annuities are now the focus of class-action lawsuits against four insurance companies (annuities are an insurance product).
The plaintiffs charge deception and fraud. They say they would not have put annuities into their retirement accounts, if they'd known the truth.
The lawsuits are targeting both the annuities found in many employer retirement plans and the annuities you might buy for your IRA, from a stockbroker, financial planner or insurance salesperson.
Some annuities don't share the sins that are under attack. The teachers' CREF retirement account for example, provides annuities at minimal cost (around 0.34 percent annually). Marketing materials from Charles Schwab, Fidelity, Vanguard and others push annuities only for money that's outside your retirement account.
But those are exceptions to the way most annuities are sold. Here's what's going on: IRAs, Keoghs, 401(k)s and other retirement accounts are tax deferred. Your money accumulates tax-free. The tax deferral covers any investment that you buy for your account: stocks, bonds, mutual funds, certificates of deposit, whatever.
A variable annuity is also tax deferred. It contains several "subaccounts" which are similar to mutual funds. You can choose which fund you want to invest your money in.
But why would you put an investment that's already tax deferred (the annuity) into a tax-deferred retirement account? The double deferral gives you no extra benefit.
If you want to invest your retirement account in mutual funds, it's cheaper to buy them directly rather than through an annuity, Butler says. You'll pay less in sales commissions and fees.
Now we're down to the nub of why salespeople urge you to buy an annuity for your IRA, and why they peddle annuities to small companies needing retirement plans. These sales earn them more money than if they suggested straight mutual funds.
Sales commissions on variable annuities average about 6 percent, according to Cerulli Associates in Boston. Some pay as high as 13.5 percent. By contrast, you might pay in the 4 percent range for mutual funds bought from a stockbroker or planner, and zero for no-load mutual funds you choose yourself.
You don't see the commission. It's buried in the so-called "mortality and expense" (M&E) fee that annuities charge to cover their overhead and profit, plus a tiny life-insurance cost.
M&Es average 1.26 percent a year, according to Morningstar in Chicago. For money management, you're charged an additional 0.84 percent for 2.1 percent overall. That compares with an average of 1.43 percent for comparable, nonannuity funds (and as little as 0.2 percent for indexed mutual funds you buy yourself).
In short, most variable annuities are an expensive way of buying mutual funds. The expense might be worth it, if you're investing money outside a retirement account and want the tax deferral. But it's a waste when you're investing retirement money that's already tax deferred.
Which brings me to the lawsuits, filed by class-action specialists Milberg Weiss Bershad Hynes & Lerach against Nationwide Financial Services, American United Life Insurance, American Express Financial Corp. and SunAmerica Inc. along with several of its affiliates.
The plaintiffs bought annuities for their retirement accounts. The salespeople, they allege, said that annuities were the right kind of investment. So they're charging deception, under the consumer anti-fraud laws. The insurers had no comment or said that the case was without merit.
Some insurance companies assert that annuities offer two other advantages, in retirement accounts.
First, if you die, your heirs generally get at least your initial investment back, minus expenses. But so few people ever make this claim that the industry has no statistics on it.
Second, the savings in an annuity can be converted into an income for life. But so can the savings outside an annuity. You don't have to have the annuity in your retirement plan.
Scrupulous sellers of tax-deferred annuities don't offer them for retirement plans. Can unscrupulous sellers do it and get away scot free? These lawsuits may decide.
Jane Bryant Quinn welcomes letters on money issues and problems
but cannot offer individual financial advice.
© Copyright 1999 Washington Post Writers Group