Variable annuities put pinch on some retirement plans

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Variable annuities put pinch on some retirement plans

By Paul Wenske, KNIGHT RIDDER NEWSPAPERS

June 15, 2003

After putting two children through college, Tim and Kay Plumlee still expected a comfortable retirement with help from $126,000 in Tim's profit-sharing plan at work.

But when a broker told them they could boost that sum with a guaranteed 6 percent annual return by investing in a variable annuity, the Plumlees, of Ulysses, Kan., jumped at what seemed a profitable, risk-free investment.

Two years later, their retirement nest egg has dwindled to $60,000. The couple, who are in their 60s, have put on hold their dreams of fixing up their house and taking a cruise.

"That was our savings," Kay Plumlee said.

William Stapp, 58, of Overland Park, Kan., lost even more. He placed his $433,000 Hallmark Cards Inc. pension in a variable annuity in 2000; that investment is now worth $190,000.

To be sure, many people have lost money in the stock market in the past two years, and insurance industry officials say the market's collapse is the real culprit.

But regulators say many aggressive insurance agents and brokers oversold thousands of people on the hazy virtues of variable annuities, often described as mutual funds wrapped in an insurance policy. They say consumers were not warned of risks or told that the complex contracts carry large commissions, hidden fees and steep surrender charges if money is withdrawn too soon.

Hundreds of thousands of variable annuities were sold monthly in the stock market's heyday, experts say. From 1995 to 2000, annual sales ballooned from $49.5 billion to $137.2 billion. Many seniors heard about them at retirement planning seminars served up with free three-course dinners. Baby boomers, dazzled by dreams of early retirement, rolled millions of dollars from employee profit-sharing plans into variable annuities.

Now hundreds of millions of retirement dollars have vaporized.

The Securities and Exchange Commission says variable-annuity complaints far outpace all other securities complaints. Most complaints claim that the investments were unsuitable for the financial conditions of the buyers.

Susan Wyderko, director of the commission's investor education division, said complaints rose 45 percent last year to 460.

She said senior citizens who thought their investments were guaranteed were "shocked to learn that the `guarantee' feature of a variable annuity requires them to die."

She said some salesmen went into nursing homes to induce 80-year-olds to transfer money from safe CDs into variable annuities that tied up their money for years.

Regulation debate

Some regulators think sweeping enforcement changes are needed.

"It gets to the point of regulatory overkill," said Carl Wilkerson, chief counsel for securities and litigation for the American Council of Life Insurers. "There isn't any lack of consumer protection. And state and federal laws already provide significant tools for regulators to prosecute wrongdoing in the market."

Not everyone agrees. Insurance analyst J.J. MacNabb of Bethesda, Md., said insurance regulators might be able to spot insurance abuses but are less able to ensure that agents used appropriate tactics to sell variable annuities.

That might change. This month, the National Association of Insurance Commissioners will consider tougher enforcement policies to protect senior consumers from agents who care more about commissions than making sure their clients make suitable investments.

The insurance industry is largely opposed to the move.

Annuities of various types are sold by insurance companies through brokers and agents. When you buy an annuity, the insurer agrees to make periodic payments in the future, depending on the contract, and charges fees for managing your money.

Industry under fire

State regulators also are seeing a rise in complaints, although no one keeps a nationwide tally.

In addition, the National Association of Securities Dealers is cracking down on big brokerage firms. It fined American Express Financial Advisors $350,000 for improper sales of variable annuities, including misrepresenting the tax benefits. The company does not admit wrongdoing.

In Massachusetts, securities regulators got a cease-and-desist order last month against Broker's Choice of America, claiming that the seminar company trained brokers "specifically to target the elderly and to scare them into selling their securities holdings for the purpose of purchasing annuities with exorbitant commissions."

A company brochure tells broker-trainees to "assume you're selling to a 12-year-old who is blind yet smart" when selling to senior consumers. "Sometimes they are unable to make a decision. You have to make the decision for them."

George Katosic, a lawyer for the company, said the brochures were quoted out of context. "When you deal with a senior, you must be sure they understand what you are talking about. You don't want to overwhelm them with slides and all kinds of figures," he said.

Even so, seminars and sales programs tempt insurance agents, brokers and others with untold riches selling annuities to seniors. Some promise commissions of more than 10 percent or trips to Hawaii.

Some veteran financial planners say problems arise because agents and brokers don't understand what they are selling. John Olson, who conducts professional education classes for insurance agents, said, "Continuing education in this industry is a joke."

Seeking redress

Industry experts say agents focus on seniors because they are less apt to scrutinize the fine print in 60-page prospectuses. They also are less prone to complain or know where to turn when they do feel misled.

The Plumlees recently were told by the National Association of Securities Dealers that it would not pursue disciplinary action against their broker. It told them, however, that they could initiate arbitration proceedings, which they are doing. Officials of the association support giving state securities regulators more authority.

The brokerage firm for which the Plumlees' broker worked, Investment Centers of America Inc., declined to comment.

Some consumers have hired lawyers to marshal their complaints.

Stapp hired a lawyer to file a formal complaint against his broker with the securities dealers association.

According to Stapp's complaint, his brokerage turned his Hallmark pension account, worth $433,000, into $190,000 through misrepresentations, unsuitable investment recommendations and fraud.

Stapp said his broker induced him to take early retirement in 2000, guaranteeing that he could receive $2,800 a month, without reducing his principal, until he was ready for Social Security.

Stapp said his broker placed his money in a variable annuity whose subaccounts were heavily invested in high-growth stocks.

Only later, after he began losing $20,000 a month, did Stapp learn that the 8 percent annual returns he was promised for retirement were guaranteed only if he died, under the death benefit.

He said that while his accounts bled red ink, his broker told him: " `We're in it for the long term -- let us worry about it.' They just constantly assured me everything was all right."

Finally, he said, he demanded that his broker move what was left in his annuity's subaccounts into conservative money-market funds, which stopped the hemorrhaging.

Industry officials say the rise in complaints has as much to do with a falling market as anything. They note that few people complain when stocks are doing well.

Maybe so. But, Stapp said: "I didn't know much about the stock market, but I knew I didn't want to lose money. So I went to a financial adviser. I was trying to protect myself from exactly what happened to me."