Taper off or cold turkey?

[kyounge1956]

When you've made a financial blunder, do you tend to just get the pain over with, and chalk up the loss to experience, or do you try to minimize the loss even though it may take a long time?

Here are the particulars: at the beginning of 2004, I opened a Roth IRA account with Ameriprise and was sold a variable annuity within the account. Naturally, it had the longer of the two available surrender charge schedules (there's a reason it's called an "Advisor Advantage" annuity). It seemed to me that after six years the surrender charge should be a lower percentage than I calculated based on the numbers on my statement, so I called the customer service line and it turns out the surrender charge continues in force until ten years after the date of the payment, not ten years after the start of the contract. I made payments on the annuity until the end of 2006, which means the surrender charge won't go away completely until the end of 2016. Right now the balance is about $14K and the full surrender charge is around $855. There are three possible courses of action:

1. I can leave it alone for another 6-1/2 years until the surrender charge goes away, or
2. I can retrieve 1/10 of the 12/31/2009 balance now and transfer it to my new Roth IRA with another custodian, pay no surrender charge but possibly incur a transfer fee, (I forgot to ask whether there is one), which will let me get at least some of my money away from those #%*@! now, without having to pay through the nose to do it, and perhaps retrieve the full balance somewhat sooner than 2016 (I think I can take out 10% of the year-end balance every year) or
3. I can cash in the annuity, do a trustee to trustee transfer to my Roth at Scottrade, close the Ameritrade account, and be done with it. Doing this would incur the surrender charge, possibly a fee for the transfer, and IIRC a $100 account closing fee...maybe about $1K right off the top.

Part of me just wants to get my money back and end my dealings with Ameriprise, but it looks like that might be doing myself more harm than good.

 

[clifp]

Here are the particulars: at the beginning of 2004, I opened a Roth IRA account with Ameriprise and was sold a variable annuity within the account. Naturally, it had the longer of the two available surrender charge schedules (there's a reason it's called an "Advisor Advantage" annuity)...

Part of me just wants to get my money back and end my dealings with Ameriprise, but it looks like that might be doing myself more harm than good.

I don't mean to laugh at your misfortune but Advisor Advantage annuity struck me as very funny. A good friend despite my pleading, not only stuck with his Amerprise[-] blood-sucking leech[/-] Adviser but gave her a lot more money.I believe she put all in bond funds (albeit risky ones at the beginning of the year).

Anyway I'll will be stealing that line for any future dealings with her.

As for you situation. Probably the most important thing is how well the underlying investment has performed for you. Trying benchmarking against a similarly risky index fund (e.g. X% Vanguard Small Cap, Y% Large growth, Z% international).

If if doesn't suck too bad compared to the benchmark AND you can stand dealing with Amersuck for 10 more year than exercising the 10% withdraw/year is probably the cheapest.

#3 is a perfectly viable option also.

 

[kyounge1956]

I don't mean to laugh at your misfortune but Advisor Advantage annuity struck me as very funny. A good friend despite my pleading, not only stuck with his Amerprise[-] blood-sucking leech[/-] Adviser but gave her a lot more money.I believe she put all in bond funds (albeit risky ones at the beginning of the year).

Anyway I'll will be stealing that line for any future dealings with her.(snip)

I don't know why I didn't notice that name until just recently.

 

[chinaco]

If it were my annuity, I would consider the fees against alternative options like a VG mutual fund. I would then project the growth forward over the duration using some market equivalent return (minus the fees for each alternative). You are likely to find it is a wash... the back-end load for exiting is about equal to the savings in fees.

If it were mine, I would dump the VA just to simplify my holdings... especially since it is a relatively small amount of money. Plus since the annuity is wrapped in a Roth therefore you will not suffer the penalty (assuming you are younger than 59.5 and do not intend to take the money out of the Roth).

IMO - The benefit of an VA (if it exists at all under current tax law with low cap gains) is to beat the tax man (deferral). In other words, one is a high income individual (while working) and has exhaust other tax deferral approaches and expect to have lower taxes when retired. Since a Roth IRA experiences no taxes on growth (it is based on taxed contributions), a VA in a Roth would not seem to yield that (potential) benefit. VA in an IRA makes no sense to me at all!

Do some projections, take action based on that information and... Consider it: A Lesson Learned.

 

[FinanceDude]

When you've made a financial blunder, do you tend to just get the pain over with, and chalk up the loss to experience, or do you try to minimize the loss even though it may take a long time?


Here are the particulars: at the beginning of 2004, I opened a Roth IRA account with Ameriprise and was sold a variable annuity within the account. Naturally, it had the longer of the two available surrender charge schedules (there's a reason it's called an "Advisor Advantage" annuity). It seemed to me that after six years the surrender charge should be a lower percentage than I calculated based on the numbers on my statement, so I called the customer service line and it turns out the surrender charge continues in force until ten years after the date of the payment, not ten years after the start of the contract. I made payments on the annuity until the end of 2006, which means the surrender charge won't go away completely until the end of 2016. Right now the balance is about $14K and the full surrender charge is around $855. There are three possible courses of action:

1. I can leave it alone for another 6-1/2 years until the surrender charge goes away, or
2. I can retrieve 1/10 of the 12/31/2009 balance now and transfer it to my new Roth IRA with another custodian, pay no surrender charge but possibly incur a transfer fee, (I forgot to ask whether there is one), which will let me get at least some of my money away from those #%*@! now, without having to pay through the nose to do it, and perhaps retrieve the full balance somewhat sooner than 2016 (I think I can take out 10% of the year-end balance every year) or
3. I can cash in the annuity, do a trustee to trustee transfer to my Roth at Scottrade, close the Ameritrade account, and be done with it. Doing this would incur the surrender charge, possibly a fee for the transfer, and IIRC a $100 account closing fee...maybe about $1K right off the top.

Part of me just wants to get my money back and end my dealings with Ameriprise, but it looks like that might be doing myself more harm than good.

I have Option #4 for you........

Call the customer service line and ask how much the "surrender-free" withdrawal amount is. Most contracts like that let you take out 10% or so a year without penalty. Take that amount and transfer it to whereever you want, trustee-to-trustee. On the anniversary date next year, you'll be able to take some more, and so on, until its gone. You should be able to get a large chunk out now without penalty.

On the amount remaining, you can ask them to put it in the subaccount that does NOT get charged M&E. Typically this is a MM account but ask for sure. That way, you can drop your internal fees 1.5% or so until you get the rest out........

 

[Rich_by_the_Bay]

I faced a similar situation several years ago after getting somewhat naively rail-roaded into an annuity.

If you try to do it strictly by the arithmetic it ultimately boils down to guessing what the market will do. After getting advice I did what FD suggests: take out your penalty-free withdrawals each year, put the entire remainder in the lowest fee option, and transfer it to your IRA when you can do so without penalty.

If they'll convert it to a competitively priced SPIA without penalty, and if a SPIA for that amount fits into your plan that may work.

 

[bks]

This link on 1035 transfers maybe of interest.

 

[Bestwifeever]

What happened that makes you want to do this now? Did something happen to make you unhappy with your 2004 decision to invest in the annuity or make that decision invalid?

Do you have to pay an annual fee to the advisor just to have the annuity? If so, would that cumulatively equal the surrender fee by 2016?

I've always followed a cut-my-losses strategy and probably would do the same thing here, paying the surrender fee, if I had a reason I wanted to move the $$.

 

[kyounge1956]

I have Option #4 for you........
Call the customer service line and ask how much the "surrender-free" withdrawal amount is. Most contracts like that let you take out 10% or so a year without penalty. Take that amount and transfer it to whereever you want, trustee-to-trustee. On the anniversary date next year, you'll be able to take some more, and so on, until its gone. You should be able to get a large chunk out now without penalty.

The 10% I mentioned under option #2 is the surrender-free withdrawal amount. Actually, it's 10% of the year end value plus some portion of this year's earnings, but if I request a transfer of that full amount, and the account value drops while they are processing it, I end up getting zinged with a surrender charge on part of it. I could take the penalty-free portion this year, next year, and 2012. In 2013 the surrender charge on the remaining balance will be down to ~4%, the balance itself will be smaller, the surrender charge as a percentage of my total holdings less significant because I will be adding to my other accounts in the meantime, and hopefully they won't raise their account closing fees again before then.

On the amount remaining, you can ask them to put it in the subaccount that does NOT get charged M&E. Typically this is a MM account but ask for sure. That way, you can drop your internal fees 1.5% or so until you get the rest out........

Right now the internal asset allocation is about 50/50, and the balance went from just under $12K "beginning value" on 1/1/09 to just over $14K the end of last year (=just over $13K "value if surrendered"). I don't know exactly how much the internal fees are, but I assume the balance on my statement already reflect the expenses of the sub-accounts. I don't know how much of a reduction is possible. I just checked and there is a listing of the sub-accounts at the end of the prospectus. The expenses range from 0.75% to 1.2%, and naturally, those of the funds in my annuity which I've been able to find quickly in the list are at the high end of the scale. Maybe there are similar funds with lower expenses. If I switch to a MM-type fund, aren't my overall earnings likely to go way down? I would expect the earnings of a 50/50 allocation less fees to be greater than money market earning with no fee, unless of course there is another big market drop, but there's no way to predict that.

 

[FinanceDude]

The 10% I mentioned under option #2 is the surrender-free withdrawal amount. Actually, it's 10% of the year end value plus some portion of this year's earnings, but if I request a transfer of that full amount, and the account value drops while they are processing it, I end up getting zinged with a surrender charge on part of it. I could take the penalty-free portion this year, next year, and 2012. In 2013 the surrender charge on the remaining balance will be down to ~4%, the balance itself will be smaller, the surrender charge as a percentage of my total holdings less significant because I will be adding to my other accounts in the meantime, and hopefully they won't raise their account closing fees again before then.

Most annuities allow a cumulative withdrawal like 20% at the end of year two if you take no withdrawals, etc. It would not surprise me in the least if the Riversource annuities are more punitive.....that's too bad......

Right now the internal asset allocation is about 50/50, and the balance went from just under $12K "beginning value" on 1/1/09 to just over $14K the end of last year (=just over $13K "value if surrendered"). I don't know exactly how much the internal fees are, but I assume the balance on my statement already reflect the expenses of the sub-accounts. I don't know how much of a reduction is possible. I just checked and there is a listing of the sub-accounts at the end of the prospectus. The expenses range from 0.75% to 1.2%, and naturally, those of the funds in my annuity which I've been able to find quickly in the list are at the high end of the scale. Maybe there are similar funds with lower expenses. If I switch to a MM-type fund, aren't my overall earnings likely to go way down? I would expect the earnings of a 50/50 allocation less fees to be greater than money market earning with no fee, unless of course there is another big market drop, but there's no way to predict that.

M&E is a seperate charge outside of the subaccount expenses. most M&E expenses are 1.15-1.60% per year, PLUS the subaccount expenses. You can do what you want, but since we are testing new highs, you could "lock in" whatever gains you have in the contract if you move to a MM account. You would have to check to see if they waive M&E expenses if you make that allocation move.

There is no perfect answer, but I believe you were looking for options, which I am providing........

 

[FinanceDude]

This link on 1035 transfers maybe of interest.

Doesn't apply here, annuity is inside a qualified account........Roth IRA............

 

[DblDoc]

I have to cop to being a card carrying member of the VA club until discovering this and the bogleheads site. FWIW I just decided to make a clean break, cashed it out and transferred it to Vanguard and chalked it up to an expensive lesson learned. I would not have had the patience to slowly get my money out and my blood pressure would have spiked each year doing so...

DD

 

[CuppaJoe]

I have a small annuity from a pension that once was with a failed insurance company. Over the years I’ve had three choices, 1) there was a short cash out period: I chose not to because the numbers were larger to collect it later as an annuity; 2) take a life-time monthly sum, or 3) take a larger monthly sum over ten years. I chose option number three partly because it does get it over with faster and also I expect to be in a lower tax bracket in the years before I will have RMDs on deferred income. I will do some Roth-conversions but not on all of it.

If pulling the bandage off ASAP saves part of your sanity, that would be priceless.

 

[FIREd]

Our Ameriprise advisor sold us a couple of variable annuities back in 2001 (at the time, I had no idea what I was getting into). I will be waiting for the surrender charges to expire in 2011 before moving the money. After fees, the annuities haven't done all that bad (4.05% / year for one, 4.88% / year for the other which is similar to what DW's 401K has done over the same period of time, i.e. 4.68% / year).

 

[deepc]

I'll agree with taking the money out, eating the surrender fee, and moving on with life. Withdrawals 10 pct at a time until some future date will have you calculating time/risk/benefits more than this bunch is worth. It's a big bite proportionately, but in the long term stretch of things your sanity is worth more than the fee...especially if you feel so negatively towards this company.

Withdraw the money and do your part to drive these fools out of business; if you're into safety a long term CD is close to your annuity's return, and forget these thieves ever existed.

 

[kyounge1956]

Right now the internal asset allocation is about 50/50, and the balance went from just under $12K "beginning value" on 1/1/09 to just over $14K the end of last year (=just over $13K "value if surrendered"). I don't know exactly how much the internal fees are, but I assume the balance on my statement already reflect the expenses of the sub-accounts. I don't know how much of a reduction is possible. I just checked and there is a listing of the sub-accounts at the end of the prospectus. The expenses range from 0.75% to 1.2%, and naturally, those of the funds in my annuity which I've been able to find quickly in the list are at the high end of the scale. Maybe there are similar funds with lower expenses. If I switch to a MM-type fund, aren't my overall earnings likely to go way down? I would expect the earnings of a 50/50 allocation less fees to be greater than money market earning with no fee, unless of course there is another big market drop, but there's no way to predict that.

M&E is a seperate charge outside of the subaccount expenses. most M&E expenses are 1.15-1.60% per year, PLUS the subaccount expenses. You can do what you want, but since we are testing new highs, you could "lock in" whatever gains you have in the contract if you move to a MM account. You would have to check to see if they waive M&E expenses if you make that allocation move.

Does "M & E" stand for "Mortality & Expense" fee? If so, there is one on this annuity in addition to the sub-account expenses, as you say. I didn't realize it was two separate fees. The Mortality & Expense fee doesn't apply to what's called the Fixed Account within the VA, but the maximum allowed allocation to the Fixed Account is 30% of the total and I've got that much in it already. Dadburn it, them varmints've cut me off at the pass agin! I will have to read the descriptions of the sub-accounts and see which ones have the lowest fees. Maybe there is a short term gov't bond fund or something. I think doing that, and taking out the penalty free amount, is about all I can do to improve the situation.

 

[kyounge1956]

What happened that makes you want to do this now? Did something happen to make you unhappy with your 2004 decision to invest in the annuity or make that decision invalid?

Do you have to pay an annual fee to the advisor just to have the annuity? If so, would that cumulatively equal the surrender fee by 2016?

I've always followed a cut-my-losses strategy and probably would do the same thing here, paying the surrender fee, if I had a reason I wanted to move the $$.

I've been thinking about it for quite some time. The decision has always been invalid—as I understand it there is almost never a good reason, from the investor's point of view, to buy an annuity inside a tax-deferred account. You pay a lot in expenses and fees, get no better return than mutual funds, and don't get any extra shelter from taxes, since the account is tax-sheltered already. I just didn't realize it was invalid until after I did it, and then the surrender charge was more than I was willing to lose all at once. I think it still is.

There is an annual fee, and it might amount to as much as the surrender charge if I leave the whole balance in until 2016. I don't think it will if I take the penalty-free amount out for a few years, and then the remaining balance.