Annuity question (what to do, what to do...)

[cj]

Hi all,

I've posted this on the Morningstar site, but also appreciate the wisdom on this site, so maybe someone here can help.  I am working at unwinding some questionable investments sold to my 73-74 year old parents (Wachovia Securities is the offending party).  The last thing to be dealt with is a variable annuity sold to them last year (you heard me right, last year).  It's the "Equitable Accumulator Plus".  Someone sent me a link to the SEC site where the prospectus lives.  From what I can tell:

1.  The surrender charge is currently 8%
2.  It looks like they can take 15% out per year without penalty.
3.  Reading the prospectus, there are fees and charges all over the place.  I have no idea what the total charges are yearly.
4.  The investments within the annuity are mostly small- and mid-cap funds.
5.  This annuity represents probably 15% of their total investments.

I thought at first they should just annuitize the thing over the shortest period they could, but if I'm reading the prospectus correctly, they can't annuitize it until 5 years after they bought it.  The folks told me they told the saleswoman that they wanted this money in a few years, so this kind of ticks me off.   

They have really flinched at paying the 8% surrender, and I can't blame them.  I'm thinking of suggesting they:

1.  Change the funds within the annuity to make them less aggressive.  It looks like they can do this without charge.
2.  Start taking the 15% per year out immediately
3.  After a couple of years when the surrender charge is not quite so severe, yank out the rest.

Is anyone out there familiar with this particular product?  Any opinions, comments, suggestions?

Thanks!!
CJ

 

[laurence]

I'm not familiar with the product, but have you thought of legal options? I'm sure there must be a lawyer that specializes in cases involving immoral scum taking advantage of old people.

I think you have the right idea, otherwise. Get out of it ASAP and post the name of this company all over the place with a warning to their practices, report them to anyone you can, and inform them you are doing just that. Raise hell, brother!

 

[Cal]

Just wanted to add that I also would appreciate any input / suggestions anyone has about this.  I just found out my parents were sold an annuity. It was explained to them (or, at least they understood it to be) that it was an IRA. They fell on the floor when I explained to them what an annuity actually was. I have just started to go thru the product's literature and trying to evaluate the lest painful (expensive) way to get them out of it.

 

[retire@40]

1.  Change the funds within the annuity to make them less aggressive.  It looks like they can do this without charge.
2.  Start taking the 15% per year out immediately
3.  After a couple of years when the surrender charge is not quite so severe, yank out the rest.

I would do #1 and #2. Unless they need to live on more than the 15%, why bother taking the rest out and pay the surrender charge?

 

[Mr._johngalt]

I'm not familiar with the product, but have you thought of legal options?  I'm sure there must be a lawyer that specializes in cases involving immoral scum taking advantage of old people.   

I think you have the right idea, otherwise.  Get out of it ASAP and post the name of this company all over the place with a warning to their practices, report them to anyone you can, and inform them you are doing just that.  Raise hell, brother!

Raising hell?   I've raised my share, but it consumes a lot of life energy
which could be used elsewhere.  Now, I tend to avoid upsets and
disputes.  Resting comfortably......................that's how I want to
finish the race.  OTOH, I don't let anyone push me around and try to
protect my parents in the same way, as best I can.

JG

 

[cj]

JG - 'fraid I agree with you! No time, no energy to raise he!!. I learned some expensive lessons of my own with a financial advisor who did me wrong. The parents and I signed contracts that we didn't understand, but we did sign them. Better to clean up the mess as soon as possible and be smarter in the future.

Retiree@40 - you make a lot of sense as well. I'd like the folks to ditch Wachovia and be done with them completely, but we've yanked everything else from them. Taking the annuity from them & paying a lot of surrender charges doesn't hurt them; from what I understand, they got their full commission up front. In this case it was probably $3 grand.

CJ

 

[Cal]

Slightly hijacking your thread here.....

CJ - you mentioned that this situation happened at Wachovia. For my parents, it was Citibank. My parents had a whole lot of misconceptions about what a bank could and couldn't do, and thought they were dealing with extremely low risk options because their advisor was a "bank" advisor and not an "investment firm" advisor.

My parents told me they would never go to a "stock" broker because stocks were "too risky" for them yet their "bank" financial advisor had them in some pretty risky funds.

Any one noticing people being "duped" more by products being pushed via banks versus "investment" firms?

 

[Brat]

After my Father's brain tumor surgery a representative from their bank tried to sell he and Mom an annuity. Thank heavens I was there and said in so many words.. don't think so!

 

[ats5g]

Slightly hijacking your thread here.....

CJ - you mentioned that this situation happened at Wachovia. For my parents, it was Citibank. My parents had a whole lot of misconceptions about what a bank could and couldn't do, and thought they were dealing with extremely low risk options because their advisor was a "bank" advisor and not an "investment firm" advisor.

My parents told me they would never go to a "stock" broker because stocks were "too risky" for them yet their "bank" financial advisor had them in some pretty risky funds.

Any one noticing people being "duped" more by products being pushed via banks versus "investment" firms?

Hey Cal et al,

Variable Annuities: Beyond the Hard Sell

See also NASD Reminds Members of Their Responsibilities Regarding Hypothetical Tax-Deferral Illustrations in Variable Annuity Communications

Here are two Notice to Members that the NASD issued to its brokers regarding variable annuities:

NASD Notice to Members 04-45

Executive Summary

Deferred variable annuities are complex investment instruments that have both insurance and securities features.1 On various occasions in the past, NASD has highlighted the unique features of these products for both members and potential investors. With the help of industry participants, for instance, NASD previously issued "best practices" guidelines in Notice to Members (Notice or NtM) 99-35 (May 1999). Notwithstanding these efforts, some members continue to engage in problematic sales practices in this area, and some investors continue to be confused by certain features of these products.2 As a result, NASD seeks comment on a proposed rule (Attachment A) relating to transactions in deferred variable annuities. In general, NtM 99-35 served as the basis for the proposed rule. The proposed rule includes suitability, disclosure, principal review, supervisory and training requirements tailored specifically to transactions in deferred variable annuities.

NASD Notice to Members 99-35

Executive Summary

National Association of Securities Dealers, Inc. (NASD®) Rule 3010 requires each member to establish and maintain a system to supervise the activities of each registered representative and associated person in order to achieve compliance with the securities laws, regulations, and NASD rules. Variable life insurance and variable annuities are securities and their distribution is subject to NASD rules. This Notice focuses on deferred variable annuity sales and provides a set of guidelines that are intended to assist members in developing appropriate procedures relating to variable annuity sales to customers.

If you think you, or someone you know has been sold a variable annuity that possibly violated rules, complain, complain, complain - Investor Complaint Center. My guess is that this isn't the first time this person has sold VA's to people that haven't been happy. Where there is smoke, there is fire.

As far as getting out of the VA, the surrender charges are there to make sure that the broker gets paid, and to deter people from exchanging out into something else [where the broker won't make any money]. You should compare the costs of staying with the VA [likely 2-3% of the investment per year] to paying the surrender charge and switching to a low cost investment. You will likely come out ahead cost wise in 3-5 years. Insurance companies and brokers know that people would rather not pay more up front in surrender charges than pay yearly fees the customer doesn't really see.

- Alec

 

[brewer12345]

CJ:

I think the most rational choice depends on what guarantees are larded into the contract. Is there a minimum withdrawal benefit on the contract? If yes, I would shift the money into the most aggressive option available and then annually withdraw the maximum amount allowed under the guarantee. In this case, the contract guarantees a minimum amount you can withdraw each year (usually 7% of contract value) and makes up the difference if the investments don't cover it. You'd end up shooting the moon with the insurer on the hook if it doesn't work out.

If the contract doesn't have guarantees, it is spreadsheet time. Pick an assumed return rate, find out what all-in costs are (I bet 3% or higher annually), and then roll forward over the next few years showing the amount left each year after taxes and surrender charges. Then you contrast this with an after tax investment with the same gross return and .2% expenses. The optimal surrender point should be pretty obvious.

There is a lot of litigation going on WRT variable annuities (check out the suit vs. Pacific Life). If I were you, I would complain to the state insurance department and the NASD at the very least. Your parents were very clearly sold a grossly inappropriate product.. It would be hard to prove anything in court, but you might get other relief.