Bibliography

Merits Of Using A Deferred Annuity To Fund An IRA,

401(k), 403(b) Or Other Tax Qualified Retirement Plan

 

Table 1 (independent views)  Part 1  Part 2  Part 3  Part 4  Part 5  Part 6

Table 2 (annuity industry views) - Part 1  Part 2

 

 

Table 1, Part 1

(independent views)

 

 

 

 

Citation

Summary Excerpt

315

Raul Amaya, “Variable Annuities Not First Place You Should Invest,” EL PASO TIMES, December 4, 2006

“Because IRAs are either tax deferred or tax-free, variable annuities, in my opinion, are not suitable for IRAs.  They’re suitable for people coming into large lump sums who have already maximized their contributions to their IRAs and who could benefit from the tax deferral and/or want the guarantees of annuities.”

 

314

Suze Orman, “Adviser Must Serve You, Not Self,” DETROIT FREE PRESS, November 12, 2006

The syndicated columnist writes that “[a]nyone who tell you to buy a variable annuity for your IRA is clearly not looking out for your best interest.  The attraction of VAs is that you get tax-deferred growth in mutual funds.  That is, no taxes while the money is invested in the VA.  But everything in your IRA is already tax-deferred anyway.  It is absurd to buy a VA inside your IRA.  Why would the adviser recommend this move?  I bet you know where I am going: Once again, there is a nice commission to be made.”

 

313

Stewart Welch, “Reasons To Be Wary of Annuities,” BIRMINGHAM NEWS, October 15, 2006 at 4B

Variable annuities are a “product that is rarely sought out by investors but instead is bought after someone has `pitched’ the product.”

 

“Some annuities are sold in IRA accounts which means you have placed a sheltered investment (your IRA) inside another sheltered investment (the annuity) resulting in an unnecessary layer of fees.”

 

The author is founder of The Welch Group LLC, a fee-only wealth management firm.

 

312

Walter Updegrave, “Retirement Deals You Can Do Without,” MONEY, September 2006 at

“It rarely makes sense to put your IRA rollover into an annuity if you’re switching jobs or still investing for a retirement that’s years away.  After all, your gains are already sheltered from taxes in an IRA.  But that doesn’t stop insurers and advisers from touting annuities as an ideal rollover investment.” 

 

The “guaranteed minimum income benefit” or “GMIB” feature of some variable annuities is of questionable financial value because you must pay upwards of 3% of your account balance every year for it (M&E fee plus rider charge), yet the “income you’re being guaranteed is underwhelming, to say the least, because insurers base it on ultralow payout rates designed more to protect them than to provide income to you.”

 

311

Buz Livingston, “A Lesson For Teachers,” THE MOTLEY FOOL, August 30, 2006

“[M]ost 403b plan choices are limited to variable annuities.  Yep, you are putting a tax-deferred annuity inside a tax deferral mechanism.  It’s like taking a shower while wearing a raincoat.”

 

310

“Ask Basic Questions In Planning For Retirement,” CONTRA COSTA TIMES, August 21, 2006 at F4

“I have never met with anyone who owned an annuity who understood what they were invested in, why they were invested in it and what fees they were paying.  After learning about their annuity’s features and fees, most people are upset.  If annuities were simpler to understand, most people would not buy them.”

 

“Investors are frequently sold annuities within their IRAs or their retirement plans at work. . . . Placing an annuity in an IRA, 403(b) or 401(k) plan is ludicrous because you are already receiving the tax-deferred benefit free of charge.”

 

 

309

“Variable Annuities: Have An IRA or 401(k)? That’s Double Duty,” WASHINGTON POST, July 30, 2006 at F04

“`With an IRA, you don’t need [a variable annuity].  While there is also a death benefit, the death benefit is so expensive, you would be better off separating the death benefit from the investment and buying insurance separately,” said Veena A. Kutler, a Bethesda-based financial planner.’”

 

308

Kathleen Lynn, “Retirement’s High Price; How Fees Can Cut Your Pension,” THE RECORD (Bergen County, NJ), July 9, 2006 at B01

Teachers are targeted for variable annuity sales inside 403(b) accounts, but the higher fees shave thousands of dollars from their nest eggs.  Both the SEC and the NASD have “issued warnings about annuities’ high fees.  The securities regulators say annuities may not be suitable in retirement plans, because retirement plans already offer tax deferral.”

 

 

307

Jan L. Warner and Jan K. Collings, “Tax-deferred Annuity Not Right Investment For This Couple,” PITTSBURGH POST-GAZETTE, July 2, 2006

“Because of the costs involved, we see no sound economic reason to purchase a tax-deferred annuity with tax-deferred dollars in an IRA or other pretax account other than to generate a sales commission and purchase the privilege of being charged additional fees.”

 

306

Jim Schlagheck, “The Power of Variable Annuities,” THESTREET.COM, May 22, 2006

“Some 401(k) or IRAs allow you to invest in an annuity.  That generally makes little sense. . . . If you currently have a `shelter within a shelter,’ consult a tax specialist about the wisdom of making a change.”

 

305

Margaret E. Haering, “A Bad Marriage?  Variable Annuities and 401(k) Plans,” WORKFORCE MANAGEMENT, May 2006

“The bottom line is simple: When suitors come calling with a variable annuity policy for your 401(k) plan, there are many good reasons to resist taking the plunge.  Like a bad marriage, variable annuities may last longer than you want and could be expensive to end.” 

 

For instance, a “plan sponsor that wants to offer a lifetime income option could do so at lower cost by providing retiring employees with information on purchasing an immediate fixed annuity.”

 

304

Martin Krikorian, “Seven Drawbacks of Variable Annuities,” THE LOWELL SUN, May 5, 2006

“If you’ve talked to a broker or agent about rolling over your retirement account, there’s a good chance the adviser recommended you invest in a variable annuity[.]” 

 

“When an adviser, agent or broker suggests a variable annuity for your rollover or IRA account, run -- don’t walk -- out of the office.  Since IRAs already are tax-advantaged, a variable annuity will provide no additional tax savings.  It will, however, increase the expense of the IRA while generating fees and commissions for the broker or salesperson.”

 

The author is a registered investment adviser and president of Capital Wealth Management.

 

303

Josh Friedman, “Seniors Get A Hard Sell On Fee-Laden Annuities,” LOS ANGELES TIMES, April 24, 2006 at A1

Dorothy “Dot” Eddy, 72, a retired middle manager for an electronics maker, says she got “taken in” by a free lunch seminar at the Chart House, run by an agent pitching annuities.  Then, the agent invited the attendees back to his office for a “personal consultation” with the promise of free coffee and fresh-baked cookies.  She agreed to use her IRA money to buy an annuity, but was never told that “the annuity’s tax deferral was essentially worthless to her, because her savings already were protected from taxes in an IRA.” 

 

302

Eric Tyson, “Do I Have Enough Life Insurance?,” SAINT-PAUL PIONEER PRESS, April 8, 2006 at 2C

“With money already inside a tax-sheltered IRA account, you should not then invest in an annuity.  The reason: You’re paying extra costs for the tax shelter of an annuity, which is not needed and is redundant with an IRA account.”

 

301

Frederic G. Marks, “Tax-Shelter Tango: Keep your IRA,” BARRON’S, March 27, 2006

Although variable annuity prospectuses in recent years have started to disclose that “no one should invest IRA money in an annuity for tax shelter. . . . more than 50% of funds now in variable annuities have been transferred from IRAs and other tax-sheltered vehicles, presumably at the urging of a sales agent.  The enormous pool of retirement funds is a tempting target for agents seeking fat commissions.”

 

 

300

Russ Wiles, “Variable Annuity In IRA Offers Little,” ARIZONA REPUBLIC, March 19, 2006

Mr. Wiles disagrees with NAVA’s position that annuity insurance guarantees can offer “great value” for IRA investors.  Other than a terminally-ill person seeking to maximize the value of the nominal death benefit feature, “in general, the annuity-inside-an-IRA argument isn’t compelling, especially if it’s cited in hopes of selling you a higher-cost investment that you don’t need.”

 

299

Archie Richards, “Annuities A Bum Deal For Some,” REPUBLICAN-AMERICAN (Waterbury, CT), December 18, 2005

A reader’s accountant suggested that she needs a retirement plan with tax advantages, and recommended a MetLife variable annuity. 

 

“Accounting organizations made a big mistake when they authorized accountants to sell investments.  The conflict of interest is too great.”  The annuity is a “bum deal” because you do not need to pay the costs of the annuity to have an IRA.  The death benefit of the annuity isn’t worth much, so “forget the variable annuity.”

 

 

298

Neil Weinberg, “Shelter Skelter,” FORBES, December 12, 2005 at 148

The insurance features of variable annuities don’t “do much to make a tax-deferred annuity a good retirement investment. . . perhaps the most galling and unnecessary” use of variable annuities is to fund retirement accounts that are already tax deferred, “a costly variety of overkill.”

 

Pacific Life sold 54% of its variable annuities to persons funding IRAs and other retirement accounts in the first half of the year.  In May, a federal court in Brunswick, GA certified a nationwide class of 120,000 investors who were sold Pacific Life variable annuities for funding retirement accounts without proper disclosures or suitability screening.  Pacific Life says in a written statement that it strongly disagrees with the claims.

 

297

Eric Tyson, “An IRA Invested In An Annuity,” SAINT PAUL PIONEER PRESS, December 1, 2005 at 2C

A couple wonders whether they would be better off if their IRAs were invested in mutual funds rather than variable annuities.  The response:  since they have the “fashion equivalent of wearing a belt and suspenders together,” they should invest in mutual funds and save the unnecessary expense of the annuity.

 

296

Timothy Middleton, “Teachers’ Investment Plans Flunk,” MONEYCENTRAL.MSN.COM, November 8, 2005

403(b) plans could hardly be worse: fees are outrageous, there’s no match and there’s no oversight.  “The insurance companies that dominate this marketplace have done a terrible job of helping workers, but a masterful one of concealing their abuses by simply refusing to reveal them to anyone -- especially the participants whose money they are frittering away.”  The annuity insurance charges for the death benefit are “pure profit for the insurance company” because over long terms, “markets are rarely, if ever, down.”

 

 

295

Mike Clowes, “Wrong Pew: Church’s 401(k) Put In A VA,” INVESTMENT NEWS, October 31, 2005

A church member was an insurance agent and sold the church a variable annuity for funding their 401(k).  The Investment News columnist was asked by another church member whether this made any sense. 

 

“This is a clear example of a highly inappropriate use of a variable annuity. . . .The insurance agent, who knew the variable annuity was for a 401(k) plan, should not have sold it for that purpose.  Obviously, he couldn’t resist easy money.  Transactions such as these give variable annuities, and those who sell them, a bad name.”

 

The article explains that neither the tax deferral or insurance features of a variable annuity make any sense for 401(k) plan participants.

 

294

James L. Watt, “Variable Annuities, Retirement Accounts Shouldn’t Mix,” FORT COLLINS COLORADOAN, September 11, 2005 at 2E

The author is a fee-only financial advisor.

 

He says it is not unusual to find that his clients were sold variable annuities inside their retirement accounts by brokers at well-advertised brokerage firms.  He says this is inexcusable, and the brokers should know that it is unsuitable.  The variable annuity “is costly for you and rewarding to the broker.”

 

293

Ray Unger, “Are Annuities Really Good for IRAs?,” THE CAPITAL TIMES (Madison, WI), August 26, 2005

The author is president of Unger Capital Management in Madison, WI.

 

Mr. Unger cautions against making the “mistake of putting one tax sheltered financial product (annuity) into another tax sheltered vehicle (IRA).  The front-end commissions and annual charges are simply not worth it.”  He supports his analysis with historical performance statistics for the S&P 500. 

 

A follow-up article on September 9, 2005 is titled “Yes, Annuities Have A Place, Just Not In IRAs.”

292

David Futrelle, George Mannes, Cybele Weisser, “15 Dumb Moves,” MONEY, July 2005 at 84

One of the 15 dumbest things you can do with your money is “[b]uying tax-free bonds and variable annuities for your IRA.  It’s like wearing a poncho and carrying an umbrella, only worse.  You get no extra tax benefit from the annuity, and the bonds’ interest will end up being taxed.”

 

291

Neil Weinberg, “Fleecing Teachers: A Billion-Dollar Ripoff,” FORBES, April 25, 2005 at 100

Teachers unions are complicit partners in the sales of deferred annuities to 1.5 million teachers at the nation’s public schools for 403(b) plans.  Unions play a large role in teacher’s decision making.  One source says that Security Benefit pays the National Education Association $3 million a year for an exclusive endorsement for its products.  The New York State United Teachers union receives $3 million every year to endorse ING as the shop’s exclusive provider of annuities. Participants end up paying for it through substandard products with high fees.

 

The main appeal of variable annuities is their tax deferral, yet teachers already have that in their 403(b) plans.  AIG VALIC, the largest vendor of retirement savings plans for teachers, “says it has revised its sales literature to more accurately portray the product.”

 

290

Walter Updegrave, “Was My Mom Conned?,” CNNMoney.com, April 12, 2005

The reader’s mom was sold an IRA annuity.  An IRA annuity is “really nothing more than buying an annuity of some sort and putting it inside an IRA.”

 

“You can get the same tax shelter merely by putting the money into a mutual fund within the IRA rollover account.  So the annuity is redundant.  You’re already getting tax deferral within the IRA, so there’s no need for the variable annuity.  Now, that redundancy might not be a problem, except for one thing: variable annuities tend to have much higher fees and expenses than mutual funds.”

 

“Variable annuity fans argue that there are other benefits that compensate for these higher fees. But I don’t think they make a convincing case.”  Moreover, if you want to annuitize, “I believe it’s better to wait until you’re ready to draw on that income before buying [an immediate] annuity rather than do it many years in advance.” 

 

289

Jack Naudi, “Variable Annuities Aren’t Worth The High Fees,” ST. LOUIS POST-DISPATCH, April 10, 2005

“There’s no good reason to offer a tax-deferred product, like a variable annuity, in a 401(k) or 403(b) tax-deferred plan.  If your company does, clip out this column and show it to your human-resource folks.  To them, I say this: You have a fiduciary responsibility to your employees, and offering them a high-fee, tax-deferred investment vehicle inside a tax-deferred account violates that obligation.”

 

288

Harry Gross, “Harry Gross Column”, PHILADELPHIA DAILY NEWS, March 7, 2005

The “financial advisor” that sold an annuity to the reader’s parents says the mom can’t make withdrawals until the annuity “matures.”  Harry says “the toad who sold them the annuity is trying to hide the fact that there will be a stiff penalty for cashing in early. . . . Annuities, especially variable annuities, rarely make sense as an investment.  They never make sense as part of a 401(k), IRA, or other tax-sheltered retirement plan.”

 

287

Rick Miller, “One on One with Adam S. Bold of The Mutual Fund Store,” INVESTMENT NEWS, February 14, 2005 at 39

An interview with syndicated radio call-in host Adam S. Bold, founder of The Mutual Fund Store. 

 

Mr. Bold argues that advisors sell variable annuities, despite their many drawbacks, because “these things pay higher commissions than just about anything else that a commission broker sells.  There’s a tremendous amount of annuities that are sold in IRA accounts.  I believe that that is on the verge of malpractices; it’s not illegal, but I don’t understand why it’s not.”

 

286

Jeffrie Voudrei, “Don’t Put Your IRA In A Variable Annuity Part I” and “Part II,” Guardingyourwealth.net, February 1, 2005

“I believe the only reason a variable annuity is recommended for an IRA is so the advisor can earn more money.”

 

The death benefit is the main argument sellers give for their recommendation, but this is “either the most expensive insurance you’ll ever buy, or it [the variable annuity fees] pays for more than insurance.” 

 

“The real reason that you are recommended a variable annuity for your IRA isn’t that it’s better for you.  It’s because it’s better for the advisor.  If you invest $500,000 in a commission-based mutual fund, the advisor’s gross commission will only be about $10,000.  The same investment in a variable annuity would yield gross commission to the advisor of $30,000-$35,000 or more!”

 

285

Eric Tyson, “IRA Is No Place To Hold an Annuity,” SAINT PAUL PIONEER PRESS, January 22, 2005 at 2C

The syndicated columnist writes that “an annuity should not be purchased and held within an IRA.”  It takes 15-20 years before the tax deferral benefit overcomes the higher fees when the annuity is held outside an IRA, so “why put money into an annuity, with its higher fees, when you don’t need its tax shelter?  If someone sold you an annuity for your IRA, I’m not surprised.  I’ve seen this happen far too often when investors are working with sales representatives eager to earn a commission.” 

 

284

Pamela Yip, “Saving In Tougher Times,” DALLAS MORNING NEWS, January 10, 2005 at 2D

Bob Stowe, a certified financial planner with Stowe Financial Planning LLC in Plano, TX, evaluates the finances of Helene Uritz, a flight attendant with United Airlines.  Mr. Stowe says Ms. Uritz made a “mistake” in purchasing a variable annuity from another financial adviser with $130,000 rolled over from a tax-deferred retirement account.”  “`She needs to understand that not all financial advisers are fiduciaries, and some of them don’t act in her best interests,’ he said.”

 

“`The normal process of retirement planning is to determine retirement needs, determine the required assets and return to meet those needs, and implement or modify the investment program to ensure that the assets will be available when needed,’ Mr. Stowe said. `The variable annuity in the rollover IRA has violated this process in every way imaginable.’”

 

Ms. Uritz did not need the tax deferral advantage of the variable annuity, and “she doesn’t have dependents” so there isn’t even an argument that she needed the death benefit.

 

283

John Henry McDonald, “Variable Annuities Within IRAs,” News8Austin.com, January 3, 2005

There’s “no reason” to have variable annuities in IRAs, “other than generating a large commission for the broker.” 

 

Sellers argue that it makes sense because you can convert a deferred variable annuity into a payout annuity.  “Well, you can do that with your mutual funds as well.  What I mean by that is because these dollars are held inside the IRA, there are no taxes incurred when you sell them.  So you can take half of your IRA dollars and buy [a payout] annuity with them.  Or take three quarters of your IRA dollars and buy an annuity with them.” 

 

The author is a certified financial planner and President of Austin Asset Management Company.

 

282

Walter Updegrave, “Ask The Expert:  Safety First: Fixed vs. Variable Annuity,” CNNMoney.com, December 3, 2004

Mr. Updegrave distinguishes between a “payout” annuity and a “deferred” annuity.  Only a payout annuity can make sense in an IRA. A deferred annuity has an additional layer of fees you do not need to pay because “the IRA already shelters your earnings from taxes.” 

 

“Unfortunately, there are many sales people out there who are only too eager to take IRA money that sits and CDs and mutual funds and roll it into annuities.  I can’t say whether they do that because they really believe it’s a good thing to do or because such a transfer results in a nice commission for them[.]”

 

281

Mike Palmer, “The `Hertz’ Advisor and ‘Not Exactly,’ ROCKY MOUNT TELEGRAM, November 8, 2004

Mike Palmer, with the Trust Company of the South, writes that he’s “seen enough broker-sold variable annuities inside IRAs to conclude” that a “stockbroker is no more qualified to build your investment portfolio than your real estate broker is to build your home.” 

 

“If broker were held to a fiduciary standard of care, conflicts of interest would come to a screeching halt.”

 

280

Warren Boroson, “Planner Sees Smart People Make Mistakes,” DAILY RECORD (Parsippany, NJ), October 13, 2004

Even smart, educated people make financial mistakes.  A fee-only financial planner says one of his new clients was a female professional who “owned a tax-deferred variable annuity inside a tax-deferred IRA.”

 

“’Totally inappropriate,’ he calls it.  It was a waste of the tax-deferred IRA.  Or a waste of the tax-deferred annuity.  And the added cost of the annuity was unnecessary.”

 

279

Kathy Chu, “Variable Annuities: A Bad Wrap?,” WALL STREET JOURNAL, October 4, 2004 at R7

The article tells the story of James Walker, a Stone Mountain, Ga. resident who trusted the recommendation of an advisor at a bank to use a variable annuity for his rollover IRA of a pension account he had at his employer, United Parcel Service. 

 

Mr. Walker had to wait 7 years for the surrender fee on the annuity to expire.  “`I felt I had been had, I felt I had been used,’ said Mr. Walker, who has now transferred his money into mutual funds in another IRA.  ‘I wish someone would have explained this to me, because I didn’t need this insurance.”

 

While the majority of variable annuities are sold inside retirement plans, at least some variable annuity sellers won’t sell them to qualified plan investors.  “We don’t even allow people to invest in our deferred variable annuity within a qualified plan,”’ said Rob Nester, a principal at Vanguard Group in Valley Forge, Pa.  “We spend time every day talking people out of it.”

 

278

John Wasik, “Annuities Can Be Of Value -- Or An Albatross,” PITTSBURGH POST-GAZETTE, September 26, 2004 at F5

The article observes that variable annuities have been intentionally sold to customers to place inside IRAs, which is “an unnecessary move since such accounts already offer tax-deferred compounding.”

 

“’I had a client who was an ill woman in her 70s who was sold annuities for her IRAs,’ said Blaine Dunn, a fee-only financial planner in Wincester, Va. ‘She didn’t even know she was being sold an annuity.  It was done solely for commission.  It was legal, but not ethical.’”

 

277

Walter Updegrave, “Ask The Expert: Annuity Confusion,” CNNMoney.com, September 3, 2004

Deferred variable annuities do not make sense for moving 401(k) money to a rollover IRAs, but an immediate annuity can be a “decent choice” if you need lifetime income.  With a deferred variable annuity, “you’ve gained nothing” using it in an IRA because the tax benefits are unnecessary.  The death benefit feature provides protection against a “low-probability event” that the market is down over a long period of time, but that feature is not worth the high fees that erode returns and result in a smaller nest egg for retirement.

 

276

Michelle Singletary, “On The Variable Annuities Alert,” WASHINGTON POST, July 25, 2004 at F01

The SEC and NASD have issued a joint report on variable annuity sales practices that has “three words for investors purchasing variable annuities: Watch your back.” 

 

“[P]urchasing a variable annuity within a tax-advantaged account will provide no additional tax savings,” according toSusan Wyderko, the SEC’s director of the Office of Investor Education and Assistance.  “It will, however, generate fees and commissions for the securities salesperson.”

 

275

Matthew Lubanko, “Variable Annuities: Beware of Pitfalls,” HARTFORD COURANT, July 18, 2004 at D3

“Many advisers also sell variable annuities inside IRAs or other tax-defered savings plans.  `Ninety-nine percent of the time, such sales amount to malpractice.  An IRA or 401(k) is already tax-deferrred.  A variable annuity just weighs down your retirement savings plan with extra expenses,’” says Benjamin Tobias, a certified financial planner in Plantation, Fla.

 

Robert Nestor, principal of retiree services at Vanguard Group, notes that the break-even point (the year in which savings from tax deferral begin to outweigh the expenses incurred from owning a variable annuity) is well beyond 20 years when a variable annuity is purchased outside of an IRA.

 

274

Elliot Blair Smith, “AmSouth’s Sales Tactics Draw Fire In Mississippi,” USA TODAY, July 12, 2004 at 1B

The article describes the “human tragedy” of “what went wrong in Starkville,” a town in Mississippi where Jim Moorehead, a salesman for a brokerage subsidiary of AmSouth Bancorporation, made a million dollars in commissions pushing variable annuities on unsuitable purchasers.  AmSouth has a history of regulatory reprimands alleging lax supervision and compliance procedures. 

 

The article includes case histories of some of Moorehead’s unhappy customers, who have variable annuities funding their rollover IRAs, and did not need the tax benefits or insurance features of variable annuities.

 

273

Kathleen Lynn, “Costs Are High, Access To Money Difficult With Variable Annuities,” DULUTH NEWS-TRIBUNE, June 12, 2004

“[T]ax deferral is wasted when the annuity is purchased inside an individual retirement account, as often happens.  That’s because retirement accounts already offer tax breaks.”

 

“Karl Graf, an accountant and financial planner in Wayne, N.J. often sees annuities inside IRAs, which `makes me cringe.’  He recently signed on a new client who had earlier placed $200,000 in a high-priced annuity within an IRA.  Most annuities allow the withdrawal of 10 percent a year without penalty, and Graf plans to use this option to `try to suck the money out of the annuity.’”

 

272

Jeffrey R. Kosnett, “Watch Your Step As Retirement Nears,” KIPLINGER’S PERSONAL FINANCE, June 2004 at 36

A profile of a retirement investor reveals that he has $313,000 in a variable annuity inside an IRA which is “a bad idea because the IRA already provides tax deferral, the annuity’s main benefit.”  The investor should move his money out of the annuity into another investment to “save substantially on annual fees.”

 

271

Tami Luhby, “Before Buying Annuities,” NEWSDAY, May 2, 2004 at E07

“Investors should consider buying an annuity after they have made the maximum contributions possible to other retirement options, such as 401(k)s and individual retirement accounts, said John Wesley, TIAA-CREF’s product manager for nonpension annuties.  Annuities also should not be bought in accounts that already offer tax deferral.”

 

270

Walter Updegrave, “Rolling Back Out Of An Annuity,” CNNMoney.com, April 23, 2004

A 30 year old reader rolled his 401(k) plan money into a deferred variable annuity funding a rollover IRA on the recommendation of a financial adviser, and now the reader has second thoughts.  Mr. Updegrave writes back that the main benefit of a variable annuity is tax deferral, and the reader does not need tax deferral, “[s]o, essentially, my problem with someone your age rolling a 401(k) or IRA or any other tax-advantaged account into a variable annuity within a rollover IRA is that you end up apying more for the benefit of tax deferral than you should.”  Mr. Updegrave is in favor of using payout annuities to create a lifetime income benefit from a portion of qualified plan accounts, but you do not need to invest in a deferred annuity to have this benefit.  You can purchase a payout annuity when you are ready for one.

 

269

Germaine Giani Weldon, “Security Dealers Issue Investor Alerts,” Biloxi Sun Herald, March 21, 2004 at D3

A “variable annuity is also not suitable for IRAs because you would be putting one tax-deferred product into another.  There are no additional advantages, just higher fees.”

 

The author is a CPA with Alexander, Van Loon, Sloan, Leven, and Favre, PLLC and AVL WealthCARE, LLC.

 

268

“Annuities 101,” CNNfn, March 1, 2004 at 5:00pm

Gary Schatsky, a fee-only financial planner, remarks that you shouldn’t even consider a variable annuity unless you’ve maxed out on your 401(k), IRA and any other available retirement plan.  Michael DeGeorge, general counsel for the National Association for Variable Annuities, replies that “variable annuities are appropriate for people who have a long-term investment horizon, people who are saving for retirement.  I agree with Gary, people who have maxed out first on their 401(k) or other qualified plans, and who are looking for additional tax-deferred growth.” 

 

Jonathan Krasney, president of Krasney Financial and a CFP, states that “one of the problems, frankly, that I have with variable annuities is that they are frequently offered as IRAs and qualified accounts.  And to me, why would somebody need to pay the expenses inherent in a variable annuity when they are making an IRA investment. . . [t]he are superfluous if you’re using them for an IRA or SEP or some other kind of qualified retirement plan. . . [people do] not have to pay the roughly 1.5 percoent mortality expense and administratiion charge that’s inherent in [variable annuities.] 

 

Next, several callers to the program complain that they were missold an annuity in their qualified plan -- “a tax shelter within a tax shelter[.]”.  Krasney advises the callers that they try to negotiate a lower surrender fee to get out.

 

267

Sheldon Bell, “Money Management For Seniors,” DESERT SUN (Palm Springs, CA), February 26, 2004 at 2B

“The potential tax benefits to you as a variable annuity investor usually take 20 years or more. . . Brokers love to sell everyone variable annuities, as they receive a high commissino and VA investments are not subject to `break points’ -- reduced commissions based on invested dollars. . . [s]o beware if your broker suggests a variable annuity for you, especially for your IRA account[.]” 

 

266

Jim Spreng, “Annuities Aren’t Always A Good Choice,” Bucyrus Telegraph Forum (Bucyrus, OH), February 24, 2004 at 2D

“Many annuities are sold to, and held inside, an IRA or a 403b.  We definately do not agree with this philosophy. . . We see absolutely no good reason to buy a high-commission, tax-deferred product to hold inside an account that is already growing tax-deferred.  It is redundant to have two tax-deferred products together, especially one with such high fees. . . If you need additional life insurance, term insurance is by far the most cost-effective manner.” 

 

The author is a registered Investment Advisor with Spreng and Pigman Financial Advisory Group, Inc. in Bucyrus, Ohio.

 

265

Kenneth Hooker, “The Adviser,” BOSTON GLOBE, February 8, 2004 at E4

A reader writes that her adviser suggests he move his IRA mutual funds into a no-load variable annuity that has a death benefit feature.

 

Mr. Hooker explains that this “element of insurance allows the annuities to qualify as tax-deferred investments.  It is for that reason that many people buy them, figuring that the cost of the insurance required to establish these as annuities is a fair price for the benefits of tax deferral.  However, you already have achieved tax deferral by dint of having this money in IRA accounts.”  Mr. Hooker says if it were his account, he would stick with the mutual funds.

 

264

Ann Perry, “Couple Seeking A Happier Retirement,” San Diego Union-Tribune, February 8, 2004

Glenda Moehlenpah, a CFP with Financial Bridges, was selected to review a retired married couple’s financial situation (ages 69 and 61) as part of “money makeover” program sponsored by the newspaper and the San Diego chapter of the Financial Planning Association.  Moehlenpah noticed that a previous financial adviser had invested the husband’s IRA in a variable annuity. 

 

“Annuities, which usually carry high commissions, are for investors who have maxed out all other tax-deferred options, which Ziggy had not.  In cases where annuities are sold for IRAs, Moehlenpah said, the variable annuity doesn’t benefit the investor, `it benefits the person who sold it.’ The IRA is already tax-deferred.  There is no reason to put a tax-deferred investment product like an annuity inside of it.  `It means your return is reduced by having this extra layer of expenses,’ Moehlenpah said.” 

 

263

Pat Holland, “They’re Back -- Variable Annuities,” LEDGER DISPATCH (Jackson, CA), February 6, 2004

The author is a fee-only investment advisor in Jackson, CA. One “major concern is when a tax deferred retirement plan like a 401(k), IRA, etc. is placed within an annuity.  Since the retirement plan is already tax deferred, there is never, repeat, never a reason to put any [variable annuity in a retirement plan like an IRA] except for the commissions they generate for the salesperson.”

 

262

Theo Francis, “How Variable Annuities Can Gnash Investors,” Wall Street Journal, February 6, 2004

Variable annuities “mean big money for the companies and people that sell them -- and, all too often, big drawbacks for the investors that buy them.”  “[S]ome 60% of annuity sales are made within IRAs and other accounts in which gains already receive the identical tax treatment.  Thus, paying the higher cost of a variable annuity for that benefit is a waste.”

261

Rick Kahler, “Is An IRA A Good Investment?,” RickKahler.com, January 30, 2004

“One thing you don’t ever want to put in an IRA is a variable annuity.  Like an IRA, an annuity is a tax-deferred bucket to put investments in.  Since your IRA investment is already tax-deferred, it makes no sense to put another tax-deferred investment inside it -- especially since fees for annuities are high because you’re paying for insurance protection.”

 

The author is a fee-based advisor with the Kahler Financial Group in Rapid City, SD.

 

260

Warren Boroson, “Free Lunch And Some Valuable Lessons,” Parsippany Daily Record, January 27, 2004

The lure of a free meal attracts people to investment seminars.  The worst sales pitches are for deferred variable annuities, “most of which bestow lavish commissions on their money-grubbing salesmen.”  A seminar by Gregory L. Daniel, a CFP from Hacksensack, gave “some useful, objective advice, such as: Don’t put annuities into IRAs. (You waste the tax-deferral benefits of one of the two.).”

 

259

Emily Hall, “The Downside Of Variable Annuities,” Morningstar.com, January 21, 2004

A reader writes to ask why there would be a variable annuity funding his company’s 401(k) plan.

 

The Morningstar analyst responds that the readers and others in similar situations should “complain to their human resources personnel about the decision to use a tax-sheltered investment product in a tax-deferreed account.”  The costs and surrender fees of annuities “usually outweigh their benefits,” and the tax benefits are unnecessary for 401(k) plan investors.

 

258

Ken and Daria Dolan, “Dolans Unscripted, Retirement Mistake: Not Using A 401(k) To Best Advantage,” CNNfn, December 22, 2003

The guest is Matthew Tuttle, president of Retirement Solutions, and the question from a viewer is whether a broker trying to sell an annuity for a 401(k) plan rollover is acting in the viewer’s best interest.  Ken Dolan calls the broker an “imbecile,” Tuttle says the annuity investment should be measured by “yield to salesperson,” and Daria Dolan says she likes to “think of it as a P/E radio, a payment extraction ratio.” 

 

The $2 trillion sitting in 401(k) plans is a “treasure trove for unscrupulous brokers,” says Ken Dolan.  This prompts “Greg” to call in, who says he sells annuities and he objects to Ken Dolan calling the brokers who sell annuities “imbeciles.”  When Greg points out that variable annuities include a death benefit feature, Daria Dolan responds that “most of us don’t invest so we can drop dead and be made whole.”  Ken Dolan concludes that when you “sit on our radio show for 15 years and find out how some people have absolutely wiped - literally wiped out” by variable annuities, you come to not “like anything about variable annuities.” 

 

257

Timothy O’Connor, “Variable Annuities - Not For You?,” Business Review (Albany, NY), October 31, 2003

“The single most important selling feature of a variable annuity is the fact that investments inside the variable annuity grow on a tax-deferred basis to the investor.”

 

“The single largest area of investor victimization involving variable annuity sales-practice abuses is the sale of large variable annuity contract policies into IRA and ERSIA qualified retirement accounts funded with large rollover distributions of employer-sponsored retirement savings plans.  The victims are usually financially unsophisticated and inexperienced employees retired from manufacturing, service and utility industry jobs.”

 

The author is a shareholder in the law firm Ainsworth Sullivan Tracy Knauf Warner and Ruslander in Colonie, NY.

 

256

Humberto Cruz, “Planner’s Annuity Advice Could Be Costly,” SUN-SENTINEL (Ft. Lauderdale, FL), October 27, 2003 at 22

A reader writes in that his retired parents recently changed financial planners.  The new planner moved one of their traditional IRAs into a variable annuity.  Does the variable annuity make sense?

 

Cruz replies:  “Every time I get a letter such as yours -- which is at least twice a month -- I want to scream” because it is likely that “big commissions” is the motivation for the sale of variable annuities for IRAs.  “So the bottom line is, unless the annuity features mean a lot to your parents, they are paying an unnecessary expense for a tax deferral they already had in their IRA.”

 

Cruz suggests considering a variable annuity “only if you have funded other tax-deferred plans to the maximum.”

 

255

David J. Drucker, “Do Annuities Qualify For Your Clients?,” FINANCIAL ADVISOR, October 2003

The use of annuities in IRAs and other qualified accounts often finds favor “with the ones selling annuities, although planners of all compensation stripes will take the other side of the debate.” 

 

Carol Wilson, of Wilson Financial Advisors Inc. in Salt Lake City, Utah feels that “a tax-deferred vehicle has no place in an IRA or qualified plan that is, in itself, tax advantaged.”

 

Warren McIntyre, of VisionQuest Financial Planning, in Troy, Michigan, says “Annuities are sold because the `advisor’ makes the most money on this product.”  Is the seller “really going to avoid the huge IRA market just because it’s the right thing to do?  “Of course not,” he says.

 

Dan Roe, of Budros & Ruhlin Inc., in Columbus, Ohio, says that variable annuities can make sense in IRAs in the “distribution phase” i.e. as payout annuities. 

 

Scott Leonard, of Leonard Wealth Management, in El Segundo, California, says “[t]here is zerio justification for putting a tax-deferred annuity inside an IRA.  However, when it comes to annuitizing, the argument flips and a very strong case can be made that the product [a payout annuity rather than a deferred annuity] belongs inside an IRA[.]”

 

254

Karen M. Kroll, “Variable Annuities: Down But Not Out,” bankrate.com, September 23, 2003

“[T]hanks to new federal tax cuts, investors are wondering if they should keep the insurance products in their portfolios” because variable annuities convert what would be capital gains and dividends, taxed at lower rates, into ordinary income taxed at the highest rates.

 

“One important note: `You never want to use annuities in a qualified retirement plan,’ such as a 401(k) plan, says [Lewis] Mandell [professor of finance and managerial economics with the University at Buffalo in Buffalo, New York]. That's because 401(k)'s and other qualified plans already allow you to accumulate money on a tax-deferred basis. There's no sense in paying the higher costs of an annuity when you can simply invest in a mutual fund and reap the benefits of deferring taxes less expensively.”

 

This article was also syndicated in print newspapers.

 

253

“Advice on Planning For Your Future,” CNNfn, August 19, 2003 at 5:00pm

The guest is Ray Loewe with the GE Financial Center for Financial Learning.  A caller says his financial planner is recommending a variable annuity for his $500,000 IRA.  Mr. Loewe responds that a variable annuity “sounds strange here because this is an IRA account” and “you’re already getting the benefits of tax deferral.” 

 

“You’d be paying a fee to an insurance company to give you tax deferral you don’t need.”

 

252

“Retirement Planning Advice,” CNNfn, August 5, 2003 at 5:00pm

The guest is Rick Applegate of First Commonwealth Financial in Pittsburgh.  Kim, in Kentucky, writes to the show that he wonders about the merits of investing $75,000 in a variable annuity recommended by a salesman who got “more out of this annuity than me” because the salesman got a 7% commission.  Mr. Applegate says that annuities are sold to people, as opposed to used as a financial instrument that makes appropriate sense.  If the variable annuity is “inside of an IRA, you got suspenders and a belt.  Why have a deferred annuity with an IRA wrap?  It doesn’t make any sense.” 

 

251

Patti S. Spencer, “Buying An Annuity In Your IRA: It’s Still A Bad Idea,” INTELLIGENCER JOURNAL (Lancaster, PA), August 4, 2003 at 5

On a list of “stupid things people do to mess up their IRAs,” number 8 is buying an annuity for an IRA.  “The IRA is already tax deferred, you don’t need to buy a product for tax deferral - the IRA already gives you tax deferral.”  Variable annuities have “more moving parts than a 747” and the insurance features are costly relative to their slim benefits.  Accordingly, “[i]f you already have tax deferral in an IRA vehicle, there is no way the numbers will put you ahead over the long term when compared to another investment in the IRA.” 

 

A NASD investor alert published May 27, 2003 -- titled “Variable Annuities: Beyond the Hard Sell” --  reaches the same conclusion.  It states that “[s]ince IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings.  It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson.” 

 

 

 

Table 1 (independent views)  Part 1  Part 2  Part 3  Part 4  Part 5  Part 6

Table 2 (annuity industry views) - Part 1  Part 2

 


updated: January 12, 2007

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Ronald A. Uitz

Uitz & Associates

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