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 2

(independent views)

 

 

 

 

Citation

Summary Excerpt

250

“Variable Annuities A Source Of Anger In Bear Market,” BALTIMORE SUN, June 22, 2003 at 1D

Some variable annuity buyers are not understanding the complexities of the product.  “One deferral is enough.  Putting an annuity into an individual retirement account doesn’t make sense, experts said.  ‘Putting an annuity in an IRA is like staying indoors and putting on a raincoat and an umbrella to keep from getting wet,’ said Christopher Brown, a financial planner in Gaithersburg.  ‘You already have the tax-deferral vehicle, which is the IRA.’”

 

249

Paul Wenske, “Surprised Investors Find Their Nest Eggs Are Variable And Vanishing,” THE KANSAS CITY STAR, May 25, 2003 at A1

The SEC says that variable annuity complaints “far outpace all other securities complaints” and most of the complaints allege that a variable annuity was unsuitable for the buyer. 

 

Kansas Securities Commissioner David Brant says that “[h]igh commissions have been the driving force for variable annuities.”

 

Because IRAs and 401(k)s are also tax-deferred, “no tax advantage is gained from taking money out of your plan at work and rolling it into a variable annuity.  Regulators say variable annuities make sense only for consumers willing to invest for 10 years or longer or who have maxed out on their other tax shelters.”

 

248

“Making the Most Of Your Retirement,” CNNfn, May 13, 2003 at 5:00pm

Attorney and financial planner Gary Schatsky is the guest. 

 

Host Ali Velshi asks “You know. . . we don’t have anybody who comes on this show, a good bunch of people, who recommend annuities.  What’s the problem?  Who’s selling them and who’s buying them if nobody’s recommending them?” 

 

Mr. Schatsky responds that people are “getting sold” annuities, but annuities can make sense only for “a very small subset[.] . . .  I am sure you do know 60 percent of annuities are sold in IRA accounts [and other] retirement accounts.  The absolute worst place for them to be.  Your putting a tax shelter in a tax shelter and your paying for it.”

 

247

Jonathan Clements, “Avoiding the 7 Deadly Sins Of Scheming Stockbrokers,” WALL STREET JOURNAL, March 19, 2003

“Why do some advisers use their clients’ individual retirement accounts to buy variable annuities?  The variable annuity may give the clients tax-deferred growth.  But the clients are already getting tax-deferred growth, thanks to the IRA.  Why not buy a simple mutual fund instead?  You guessed it: It is all about the adviser’s take.  `The commissions are higher on annuities than on mutual funds,’ says Jeffrey Camarda, an investment adviser in Orange Park, Fla.

 

246

Melissa Preddy, “53 and Out?,” DETROIT NEWS, March 10, 2003 at 1B

Fernando Ortiz, a certified financial planner in Southfield, MI, recommends that a couple in their ‘30s reevaluate some aspects of their retirement planning, such as a 403(b) account invested in a variable annuity, “which is expensive and not appropriate inside the already-tax-deferred plan.”  Ortiz suggests checking with “plan administrators about the possibility of a different investment choice.”

 

245

Mark McGarvey, “Consider Benefits, Disadvantages Of Annuities,” Business Journal (Birmingham, AL), February 28, 2003

The author has been in the financial services business since 1976 and established his firm, Meld Financial Inc., a Registered Investment Advisor, in 1984.

 

“The single most disturbing trend we regularly see is the annuity sale in IRA accounts.  Although annuities may be appropriate for individuals in a higher marginal income tax bracket, we do not believe it is appropriate for an IRA investment.  Since an IRA is already a tax-deferred vehicle, we see no reason to pay the higher fees charged by the annuity.”

 

244

Gail Marks Jarvis, “Variable Annuities Have Specific Role,” SAINT PAUL PIONEER PRESS, January 24, 2003 at 1C

A reader writes that a financial planner is recommending a Pacific Life variable annuity Roth IRA. 

 

Ms. Jarvis responds: “Because planners are paid high commissions for selling variable annuities, all too often they recommend annuities to clients who shouldn’t buy them.”

 

“And it looks like you may be such a person. . . . It is unnecessary to put a variable annuity into any type of IRA. That’s because variable annuities are typically intended to shield a person from taxes. . . . But an IRA already is tax-deferred, and money in Roth IRAs is never taxed -- even when you withdraw it -- if you follow the rules.  So it’s not necessary to put one tax-deferred product within an account that’s never going to be taxed anyway.”

 

243

Scott Burns, “Annuity Seems Silly For Roth,” DALLAS MORNING NEWS, January 16, 2003 at 1D

A reader’s financial advisor is pushing a variable annuity for a Roth IRA because it supposedly “won’t lose principal,” but the reader thinks that “a variable annuity for a Roth IRA seems almost illegal or at least unethical to me.”  Who is right?

 

Mr. Burns responds that “[v]ariable annuities exist to benefit those who sell them and the insurance companies that create them.  The investor is the source of funds.”

 

“Using a variable annuity in a Roth IRA is as silly as using a variable annuity to fund an IRA, a 401(k) or 403(b).  There is no need to add the expense of insurance contract tax deferral to a plan that is already tax-deferred or tax-free.” 

 

The insurance features of deferred annuities, such as a “living benefit” that allows you to annuitize a pre-set contract value in the future using an annuitization table that may not be at a competitive rate, come with extra charges, contain limitations, and “may not be actuarially sound.”

 

242

Karen Damato, “Do Annuities Belong In IRAs?,” WALL STREET JOURNAL, January 6, 2003 at R23

A settlement between American Express Financial Advisors and the NASD concerning the selling of variable annuities for qualified retirement plans, and pending class action lawsuits challenging deceptive sales, “raise questions for many annuity holders:  Is the variable annuity you hold in your individual retirement account, 403(b) plan or other tax-deferred plan really appropriate? If not, what can you do about it?”

 

“Many financial advisers say variable annuities, which are retirement-savings vehicles with investment choices similar to mutual funds, should rarely be held in retirement plans. One of the biggest attractions of annuities -- the fact that taxes on earnings are deferred until money is withdrawn -- is of no value when investing in a retirement account that provides the same tax shelter, advisers say.”

 

“Many retirement-plan investors `would be better served simply buying mutual funds and bypassing the costs associated with an annuity,’ says Tim Medley, a financial adviser in Jackson, Miss. With annuities, he says, ‘the annual drag on earnings over time becomes a huge number.’ The NASD guidelines for annuities sellers say they should tell customers who invest through retirement plans the tax advantage of annuities is ‘unnecessary.’”

 

“Critics say investors would do better to purchase life insurance that is separate from their investments and suggest that people wait to buy an "immediate" annuity in retirement if they seek lifetime payments. They also say a substantial part of the higher annuity fees goes to pay sales commissions that are higher on annuities than they are on mutual funds.”

 

241

Matthew Lubanko, “Investment Pitches That Raise Red Flags,” HARTFORD COURANT, December 22, 2002 at D1

“The deceptive sales practices of old. . . are likely to persist.  They’re too time-tested and too profitable to stop.”

 

The top investment “sham” is an “annuity inside an IRA, 401(k) or 403(b).” 

 

“Annuities inside retirement plans. . . make about as much sense as four shoes on two feet. . . .Yet many financial advisers continue to sell variable annuities inside retirement savings plans -- and many get suckered into buying them.” 

 

240

Charles A. Jaffe, “Even The Smallest Of Frauds Can Cost Consumers Big-Time,” BOSTON GLOBE, December 12, 2002 at D5

“[I]n the public’s search for bad actors in corporate scandals, it’s important not to overlook the small frauds, the little situations that are much more likely to hurt everyday people.”  Last week, the NASD censured and fined American Express Financial Advisors $350,000 for violating sales practice and supervision rules regarding variable annuities, specifically, not determining whether a variable annuity was suitable for qualified plan investors for some reason other than tax-deferral, and failing to explain to customers that the tax deferral benefit of a variable annuity is useless when it is used in a retirement plan.

 

“These kinds of questionable practices in the financial services industry generally stay under the public radar because they affect one person at a time.”

 

239

Gail Marks-Jarvis, “Be On Your Toes With Variable Annuity Advice,” Saint Paul Pioneer Press, November 10, 2002 at 1D

“Because financial planners, stockbrokers and insurance advisers are paid high commissions for selling variable annuities, all too often they recommend the annuities to clients who shouldn’t buy them.  Sometimes advisers do this without any ill intent.  They may simply be poorly informed and inundated with sales materials from insurance companies lauding the merits of variable annuities.”

 

Investors should “be skeptical if an adviser suggests a variable annuity as the best investment to put into an IRA. . . . There is no reason to put a variable annuity into an IRA for a tax break because IRAs already give investors a tax shelter.”

 

John Huggard, a North Carolina State University business professor “who touts the merits of variable annuities,” says that after contributing the maximum to a 401(k) or other employer-sponsored plan people “should also put a maximum of $3,000 into a Roth IRA before considering a variable annuity.”

 

238

Kenneth Hooker, “Shaky Market Requires Balanced Plan,” Boston Globe, November 3, 2002 at E4

A reader writes that her daughter seems to have an excessive number of different mutual funds, the largest of which is actually an American Express variable annuity in a Roth IRA.

 

Mr. Hooker comments that “I am also confused as to why Roth IRA money would be invested in a variable annuity account.  Since the money is in a Roth account, the tax advantages provided by the annuity status are entirely redundant.”

 

237

John Waggoner, “Variable Annuities Fit Only Small Niche,” USA TODAY, October 18, 2002 at 3B

“A recent study by discount brokerage Charles Schwab suggest only a fairly small group of people need VAs: Long-term investors in high tax brackets who have filled all their other retirement options.”

 

“One of the first conclusions of the study: You shouldn’t put your IRA in a VA.  You get no added tax benefit, and you typically get higher annual fees and surrender fees, too.”

 

236

Lewis Schiff, “Weighing Variable Annuities,” CNN Money, September 3, 2002

Two very important things to keep in mind about variable annuities: “First, they typically carry high costs, usually much higher than simply owning the same investments directly.  Second, while they offer tax-deferral, you can get this from investing in your 401(k) or IRA.  This generally makes people who have maxed out their contributions to these accounts but who want to invest still more on a tax-deferred basis to be the best candidates for variable annuities.”

 

235

Jim Mackinnon, “Give These Plans Serious Thought, Investigation Before Purchasing,” Akron Beacon Journal, September 1, 2002 at D1

Deborah Lavinsky, a financial planner based in Rocky River, Ohio, who specializes in retirement services, says annuities aren't appropriate in certain cases.  “For instance, variable annuities in particular shouldn't be held in a tax-deferred individual retirement account, because the annuity is already a tax-deferred vehicle, she said.” 

 

"`I see them as tremendously oversold,’ said Patrick Hanratty, a certified financial planner and managing director of Capital Advisors Ltd. in Cleveland. In many cases, he said, annuities are `sold for commission as opposed to what's best for clients.’" 

 

Harlan Storey, a fee-only certified financial planner and founder of Cornerstone Capital Advisors in Green, Ohio, says that the “commissions on (annuities) are unbelievable.”  

 

234

Robert Barker, “Cops And Teachers Are Getting Soaked,” BusinessWeek, July 29, 2002 at 108

The article describes “the big runaround” that public employees receive when they try to get answers to why their plan investment options are “costly variable annuities sold by insurers.”

 

“With an estimated $580 billion in [457 and 403(b)] plans, an extra 1% in fees would drain $5.8 billion each year from these employees’ retirement accounts.”

 

“This remains an unhappy truth despite widespread warnings from experts against using annuities, which are already tax-deferred, within tax-deferred plans.” 

 

233

Five Variable Annuity Salespitches To Look Out For,” insure.com, July 12, 2002

“An agent may also try to persuade you to roll money from your 401(k) or IRA into a variable annuity. However, keep in mind that this money is already tax-deferred, meaning that you will be paying higher fees for a tax-deferral feature you already have, and losing withdrawal flexibility.”

 

232

Karen Damato, “In This Declining Stock Market, Surrender Fees Are Extra Blow,” Wall Street Journal, July 5, 2002 at C1

Is it worth paying a surrender fee to ditch a disappointing investment?  Consider whether there is an investment reason other than market performance to drop the product.  Tim Medley, a financial advisor in Jackson, Miss., “says there are clearly some cases in which a security isn’t right for the investor --- such as when an investor holds an annuity within an individual retirement account that already offers tax deferral.  `We see that a lot,’ he says.”

231

Dick Schlote, “Financial Common Sense,” Disciplined Capital Management, July 2002

“The fact that annuities are an insurance product should automatically set off an alarm in your head. . . . Why do you need an expensive annuity when your IRA already is tax deferred?  It’s like having a belt and suspenders.”

 

“A prospective client who was a controller for an insurance company once told me that if we advised him to invest his IRA in an annuity he would walk out, because he knew first hand how much commission his sales people made from them and how inflexible they were.”

 

230

Kathleen Gallagher, “Value Of Annuities As Investment Tools Depends On Whom You Ask,” Milwaukee Journal Sentinel, June 23, 2002 at 1D

Thomas M. Wargin, vice president and portfolio manager at Liberty Financial Group Inc. in Elm Grove says that annuities are “almost never” a good option, and one hard and fast rule about when to definitely avoid them is “[n]ever buy an annuity in any retirement account, such as an IRA or a Roth IRA, because those accounts already offer the benefits of tax deferral.”

 

Jim Folwell, a consultant at Cerulli Associates Inc. in Boston thinks annuities can make sense if investors have already reached the contribution limits for retirement accounts such as 401(k)s and IRAs, and have a long enough time horizon to realize the benefits of deferring taxes.

 

229

Andrew Leckey, “Variable Annuities, Oldies But Not Goodies,” Chicago Tribune, May 28, 2002 at B5

“They once were hot, and now they’re not.”  According to industry statistics, variable annuities only attracted half as much new money in 2001 ($30 billion) as they did in 1997.

 

"`The individual often buys a variable annuity from an insurance person coming to the house or buys it in a bank lobby,’ said Chris Cooper, certified financial planner with Chris Cooper & Co. in Toledo, Ohio. `They're sometimes sold to people for IRA rollovers, which is pointless because you're sticking a more expensive tax shelter inside of another tax shelter.’"

 

Dan Nahomey, managing editor for Insure.com in East Hartford, Conn. states that "Variable annuities should only be used by people who have done all the other things first, such as maxing out their 401(k) and IRA."

 

228

Cameron Huddleston, “What To Ask Before Buying An Annuity,” Kiplinger.com, April 25, 2002

“You shouldn’t even consider investing in an annuity unless you are already contributing the maximum to other retirement plans, such as an IRA or 401(k).  That’s because those plans provide the same tax deferral as annuities but without as many fees.  If you invest in an annuity inside a tax-advantaged account, you get no extra tax benefit.”

 

227

Jeff Wuorio, “Money Matters,” bankrate.com, April 11, 2002

The author explains that since the primary reason for buying a deferred annuity is tax deferred growth, “don't make the mistake of providing unnecessary layers of tax-free growth. Following a similar statement from the National Association of Securities Dealers, the Securities and Exchange Commission recently declared that variable annuities often are unsuitable investment options when part of a tax-deferred retirement plan, such as a 401(k) or an individual retirement account. Since those are already tax deferred, the SEC pointed out that buying a deferred annuity meant that investors merely paid extra fees to an insurance company for tax benefits they are already receiving free of charge.”

 

226

Dick Schlote, “Financial Common Sense,” Disciplined Capital Management, April 2002

“Banks are in the business to make money, and they make lots of it on annuity sales.”

 

A “situation frequently seen” is that people have rollover IRAs in annuities sold by financial firms that had presented themselves as offering products such as stocks, bonds and mutual funds.  But “upon closer inspection you find out that your IRA rollover is now in an annuity.  Since your IRA is already tax-deferred, why would you need to have it invested in an annuity, whose primary advantage is that it is tax-deferred?”

 

“Our position is that annuities are rarely appropriate as an investment product and never appropriate in an IRA account.”

 

225

Sue Stevens, “Reader Mailbag: Annuity In An IRA? ,” morningstar.com, March 21, 2002

A reader writes that her financial planner recommended an equity index annuity for her IRA, but this seems questionable since “why would I want to put my IRA into a tax deferred instrument?” 

 

Sue Stevens responds: “You wouldn’t.  Find another planner. Be sure you know how they are compensated . . . .[T]here are specific situations where annuities may be helpful, but inside a tax deferred plan is never one of those situations.”

 

Sue Stevens, CPA, CFP, MBA, and CFA Charterholder, is Director of Financial Planning for Morningstar Associates, LLC.

 

224

Rick Bloom, “Annuities Limit Choices For Portfolio,” DETROIT NEWS, March 12, 2002

A “thirty-something” reader wants to know whether, for someone his age, a deferred annuity could make sense for a rollover account, since this is what his financial advisor is recommending.

 

Mr. Bloom responds: “I believe that you need a new financial adviser. It never makes sense to use a variable annuity within a retirement account.”

 

“In the annuity, you are limiting yourself to a set number of funds. If you create an IRA, you would have an unlimited number of investment alternatives and greater flexibility. Why limit your investment alternatives? The answer is that there is no reason other than to pay the salesperson high fees, which come from you.”

 

“Further, the IRA already is tax-deferred; there is no need to pay the extra administrative fees of a variable annuity in order to receive tax deferral.”

 

223

Your Money, “Rolling 403(b) Into A 401(k) Not A Slam Dunk,” The Orange County Register, March 3, 2002

Scottt Dauenhauer, a certified financial planner and co-author of “The Wise Guide To Your 403(b)” is the guest expert.  He writes that “[w]ith little exception, variable annuities do not belong in 403(b) accounts. . . over time [high costs] can erode more than 40 percent of your 403(b) account’s value, completely negating any tax benefits of the 403(b) account.  High fees effectively leave your 403(b) impotent.”

 

222

Dr. Don Taylor, “A Variable Annuity In An IRA?,” bankrate.com, February 7, 2002

“Variable annuities are tax-deferred investments, but so are IRA accounts, so you don't need a variable annuity to defer taxes within your IRA account. Variable annuities also provide an insurance component that guarantees that you won't lose principal regardless of investment performance if you die before starting to receive income from the annuity.”

 

“Most IRA investors would be better off not having the insurance component because what they pay for insurance is likely to exceed any losses they might experience in their portfolio over time.“

 

221

Suzanne Lako, “The Bottom Line on Annuities,” The Henssler Financial Group, January 18, 2002

This is the Tip of the Week feature on the Money Talks radio show with Dr. Gene.

 

“Never buy an annuity inside an IRA.  Some investors are given advice to purchase an annuity product inside an IRA.  There is no reason or justification to do this.  IRAs are already tax deferred, making the tax-deferral feature of the annuity worthless inside the IRA.”

 

220

Avrum D. Lank, “Taxes Are Deferred On Annuity Earnings Even Outside An IRA Account,” Milwaukee Journal Sentinel, December 29, 2001 at 1D

A reader writes that a bank financial adviser recommended investing an IRA in a deferred annuity, a product with which the reader has no knowledge.  The columnist replies that the reader is “right to be skeptical about putting an annuity in an IRA.”  Since annuities are designed to hold investments on a tax deferred basis, the “management fees and projected returns of annuities take the value of this deferral into account.”  So, “it makes little sense to pay extra” for an annuity.

 

219

David Edwards, “Before You Invest, Ask How Your Adviser Gets Paid,” TheStreet.com, December 12, 2001

“I recently reviewed a prospective client’s portfolio and saw something that really made me mad.  In an IRA account was a $100,000 variable annuity.  What’s the bid deal, you says?  Well, variable annuities are tax-advantaged investment vehicles, which are generally sold with high, undisclosed commissions and painful surrender charges. . . . There’s no advantage to owning such an annuity within an IRA account, which is already tax-advantaged.”

 

Mr. Edwards writes that the client could have bought an inexpensive term insurance policy, if there was an insurance need, but didn’t get that recommendation because the agent would have had to settle for something less than the 7% commission paid on the sale of the annuity.

 

218

Rick Miller, “Vetting E-Mail Ads Vexing To Advisers,” Investment News, December 10, 2001 at 1

The article describes an e-mail ad company that sends 250,000 financial advisors “sleazy” promotions for using high commission annuities with high early year surrender fees for targeting investors who wish to convert their IRAs to Roth IRAs.  The annuity is sold on the basis that it lowers the tax due upon the conversion, because the IRA custodian will report to the IRS the lower surrender value, rather than the account value, of the annuity.    Commissions of 15% on these annuities suggest that people save on taxes only because they wasted their assets.  Wade Griffin, a certified financial planner and lawyer with Austin Asset Management Inc., in Austin, Tex., states that he is “constantly amazed at the tactics that the insurance companies will come up with to sell these [annuities] that are overwhelmingly bad deals.” 

 

“`You’re still paying the tax. . . . Congratulations, you’ve paid less tax because you bought a crappy investment - that’s the thinking behind it.’  Besides that, he adds, annuities inside of an IRA are `a horrible idea.’”

 

217

Morning Memo,” Cincinnati Enquirer, December 5, 2001

Today’s money tip from Amy Higgins: “Putting money in tax-favored or tax-deferred investments — such as savings bonds, municipal bonds or variable annuities — that are in tax-advantaged retirement accounts is redundant and wasteful.”

 

216

“Understanding Annuities Could Save You Thousands In Fees!,” Money Matters, King County Credit Union, Winter 2001

The article quotes Geleg Kyarsip, Investment Representative with the King County Credit Union.  “I frequently see some members who have put IRA money into a variable annuity.  This redundant move (placing a tax-deferred investment inside a tax-deferred account) may end up costing them plenty in extra fees.”

 

“Free is much better than fee! Take time to learn more about retirement account options yourself, don’t just rely on your broker.”

 

215

Karin Price Mueller, “Couple Wonders Whether They Can Retire Early,” BOSTON HERALD, November 4, 2001 at 33

Matt Fitzpatrick, a certified financial planner and assistant vice president of financial planning at Enterprise Bank & Trust, in Lowell, Mass., has some advice for Helen, who has $12,000 invested an annuity in her IRA. 

 

“Because the IRA already offers tax benefits, the annuity inside the IRA adds no extra tax protections, but it has extra fees. The annuity was purchased in 1993, so its surrender charges should expire over the next few years. When the charges no longer apply, he recommends she roll over those funds to a regular mutual fund.”

 

214

Patti S. Spencer, “Beware Of Annuities’ Taxation Shortcomings,” Intelligencer Journal (Lancaster, PA), October 22, 2001 at 5

“Income deferral is completely irrelevant, if the annuity is to be held in an IRA or other retirement account.  The IRA or retirement plan already is tax-deferred.  If anyone tries to convince you to buy an annuity inside your IRA or retirement plan, put your hand firmly on your wallet, turn, and run.”

 

Patti S. Spencer is a Lancaster, Penn. attorney.

 

213

Jonathan Clements, “Evaluating A Broker, Planner Is A Challenge For Investors,” Wall Street Journal, October 16, 2001

How do you know if your adviser is any good?  With the help of investment experts Clifford Asness, Thomas Benson, Douglas Bergman, Ross Levin, Michael Maloon, Meir Statman and Alan Weiss, the author compiles the top 10 lines that, if heard from a broker or financial planner, indicates that “you should probably grab your money and run very fast in the opposite direction”:

 

One of the top lines is “`[t]his variable annuity is perfect for your IRA.’ An individual retirement account gives you tax-deferred growth.  Why put a tax-deferred annuity inside it?  Advisers will talk up the annuity’s usually useless insurance feature.  The real reason: Annuities generate lucrative commissions for the adviser.”

 

212

Dr. Robert Stepleman, “Problems With Brokers Can Crop Up,” Sarasota Herald-Tribune, September 2, 2001 at D1

Among the common ways that financial professionals take advantage of clients is to recommend that an “investor move an established IRA or other tax-deferred investments into a variable annuity.  Because the original investments are already tax-deferred, the variable annuity usually offers little except high cost to the investor and high commissions to the salesperson.”

211

Pam Horowitz, Winning With Your 403(b) (John Wiley & Sons, Inc., September 2001) at 8, 192

“[T]here’s no need to house your 403(b) in an annuity to get that tax-deferral benefit.  In fact if you do, you’ll pay unnecessary annuity management fees along with mutual fund fees and high surrender fees if you want to get out.”

 

In retirement, persons who desire to annuitize their income payments for life can purchase a payout annuity when they need it.  “According to Ken Deptula, annuity specialist at Vanguard, `It only makes sense to convert to an annuity if you plan to annuitize.  Otherwise you’re paying for two layers of tax-deferral that you don’t need, along with unnecessary fees (mortality & expense, administrative charges) that you don’t need.’”

 

Pam Horowitz is a writer, teacher, reading specialist, and hands-on activist/expert on 403(b) investing.  Her focus turned to 403(b)s after she realized that her own plan’s performance was lackluster.

 

210

Warren Boroson, “Where To Put Retirement Money,” Daily Record (Morris County, NJ), August 31, 2001

Henry K. Hebeler, former president of Boeing Engineering and author of “J.K. Lasser’s Your Winning Retirement Plan” finds that variable annuities are among the worst retirement vehicles, due to the length of time it takes for the tax deferral advantage to overcome the fees. 

 

“Actually, there is one vehicle even worse than an expensive variable annuity, in Hebeler’s view: a variable annuity inside an IRA.  `The adviser gets alot of money. . . and the investor is saddled with high fees[.]”

 

209

Rick Bloom, “Fees, Excess Cost Preclude Keeping Money In Annuity,” Detroit News, August 28, 2001 at B5

“[I]t never makes sense to invest in a variable annuity within an IRA. . . you end up paying a substantial fee on a year-by-year basis for no benefit whatsoever.”

 

208

Holly Nicholson, “Rolling Over To An IRA Makes Sense,” News and Observer (Raleigh, NC), August 26, 2001 at E14

A reader, who was recently laid off, asks about the advice received from a financial planning firm that solicited a rollover IRA investment in a variable annuity.  The planner promoted the tax advantages, death benefit and probate advantages of the annuity.

 

The columnist answers that “[t]he main advantage of investing in an annuity is the tax-deferred growth it offers.  This benefit duplicates the tax-deferred growth in an IRA.  Because an IRA is already a tax-deferred investment vehicle, why place a tax-deferred annuity under an IRA umbrella?”

 

“An IRA allows you to name a beneficiary just as an annuity does.  It is the ability to name a beneficiary that simplifies the probate process.”

 

207

Susan Tompor, “Investors Tangled In Variable Annuities,” Detroit Free Press, August 20, 2001 at 3F

Two retired community college teachers were sold variable annuities in their rollover IRAs without disclosure that it was a redundant product.  It will cost them more than $15,000 in surrender fees to undo the transaction, so they are taking their case against the brokerage arm of Standard Federal Bank to arbitration. 

 

What makes VAs a popular sell?  “For brokers, there are often hefty commissions.  For savers, there’s the lure of tax savings.”  But you do not need a VA to save on taxes if you are investing through an IRA or 401(k) plan.  A spokesman for the bank says the couple’s complaint has no merit and that the VA is “consistent with their stated goals.”

 

206

Pat Curry, “Why Annuity Sales Have Skyrocketed,” bankrate.com, August 7, 2001

“[I]f a salesman suggests that you buy an annuity inside your IRA, financial advisers are unanimous in their advice – show him the door.  [John] Sestina [a fee-only certified financial planner in Columbus, Ohio] calls the practice a debacle because the two products do the same thing – shelter income from taxes.  There’s no reason to use funds from one to buy the other.  `It’s crazy because the insurance product is a tax-sheltered product,’ he says.”

 

“[Joel] Javer [a certified financial planner and a partner in the firm of Sharkey, Howes and Javer Inc. in Denver, Colorado] was even more pointed in his criticism of variable annuities sold in IRA accounts.  `That’s the most ridiculous thing in the world,’ he says.  ‘That says it all.  There’s no reason to do it than to disguise a commission, so they can sell it as a no-load investment.  I have no bias as to how people are compensated, but when I see variable annuities in IRAs, I know why they did it.  You probably wouldn’t use the word `scum.’ Well, maybe you would.’”

 

205

Eric Tyson, “Don’t Purchase An Annuity Inside A Retirement Account,” Washington Times, July 20, 2001 at B9

“You should not purchase an annuity inside a retirement account, because annuities carry higher fees than comparable mutual funds.  You don’t need the annuities’ tax shelter since your money is already inside a tax-sheltered IRA.”

204

Kathy M. Kristof, “Assessing Value Of The Advice And The Advisor,” Los Angeles Times, July 5, 2001

“Another sign of a product sale for its own sake: An advisor buys tax-deferred annuities for an individual retirement account.  The bottom line is that the client is getting one benefit – tax deferral – for the price of two.”

 

203

Eric Tyson, “Weigh Many Factors When Looking At Insurance,” Seattle Post-Intelligencer, June 11, 2001 at D2

“With money already inside a tax-sheltered IRA account, you should never ever then invest in an annuity.  The reason: You’re paying extra costs for the tax shelter of an annuity that is not needed and is redundant with an IRA account.”

 

“Why, then, do investors sometimes put IRA funds into an annuity?  In my experience, the answer almost always is because an insurance representative pitches the annuity to gain a commission.”

 

202

Kathleen Lynn, “Hard Lessons For Teachers; High Fees Cut Into Retirement Returns,” The Record (Bergen County, NJ), May 2, 2001 at B1

“The big drawback of 403(b)s is that traditionally, teachers have bought annuities in their plans, rather than cheaper mutual funds.  That costs them, on average, 1.29 percent a year more than their friends in private industry pay.”

 

“Don Kuehn, a 403(b) critic with the American Federation of Teachers, calls the sales reps `sharks’ and says, `The insurance aspect is a joke.’”  “`What’s the purpose except to line the pockets of the people selling them?’”

 

201

David Foster, “Bottom Line Guide To Perfect Retirement,” BOTTOM LINE PERSONAL, April 15, 2001 at 7

“It never makes sense to have IRAs or other retirement funds invested in tax-deferred annuities because the money is already growing tax-deferred.  Also, most annuities have high fees, sales charges and surrender charges.”

 

The author has been named by Worth magazine as one of the country’s top financial planners for the past three years.  He is with Foster & Motley, Inc., Cincinnati, OH.

 

 

 

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

 


See Part 1 for rights and permissions.

 

Ronald A. Uitz

Uitz & Associates

1717 K St NW Ste 600

Washington, DC 20036

202-296-5280