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Ot: Qualified Annuities

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OT: Annuities inside an TIRA, but not in a 403b: Seeking a low cost annuity that guarantees your initial investment.

 

I just found out an older friend of mine got himself locked into prudential annuity inside an IRA. He's paying a total of 4.55% annually and he just got in two years ago and if he leaves it he'll have to pay a 9% surrender charge.

 

I suggested he just get out of it an into a non-annuity no-load indexing investment, like Vanguard. I figure with a simple index portfolio using his preferred allocation total fees would be %0.10 (admiral shares). By my math, given his allocation, I figure if the market performs with at 6.13% return he could make up the surrender charge in less than three years. (50/50 Stocks/Bonds) But he really wants an investment that protects his initial investment despite market returns.

 

What I'm looking for is a variable annuity with a death benefit or at least one that guarantees he can't lose his initial investment if he holds it until death. I don't need tax sheltering (because it's in an IRA) and he doesn't need any income from it, but he is taking the RMDs only because he's required to. He plans to leave it in there until death for his beneficiaries. He's 77 years of age.

 

Anyway, I called Vanguard and they do offer a variable annuity for about 0.61% in costs plus another 0.2% for the death benefit. However, they only offer the death benefit if you're 75 or younger.

 

I called Fidelity and they offer an annuity with a death benefit for about 1.9% including fund costs. I'm considering that now. With his allocation under "normal" market conditions, I estimate he could make up the difference in just under four years. But, to be blunt, the risk is that he may die before he makes up the cost of the surrender fee, and if the market under performs it will take even longer.

 

My main question to the group is who else should I look into? T.Rowe Price doesn't offer a variable annuity with a death benefit inside of an IRA, nor does Tiaa-cref. Any other no-load or low-fee companies I should look into?

 

Thanks for your suggestions.

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Is this guy over 75? Is that why you are avoiding the Vanguard one? If so he might want to try to "get tough' with Prudential. They shouldn't sell a variable annuity with big surrenders to someone so old. Otherwise you can calculate the cost of this guarantee which looks like would cost 1.9% @ Fidelity and he could purchase life insurance for that amount and be in roughly the same place because that is what he is in essence doing.

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Guest Joel L Frank

How much money is involved? In my view the gauaranteed death benefit of a variable annuity is an unwise purchase. One keeps paying the "premium" even after the value of the account far exceeds the original investment---the guaranteed death benefit. So your paying for a death benefit that, most probably, will not be paid.

 

That being said, if he doesn't need income from the account and is just taking his RMD he is really investing this money for his heirs. Would it not be prudent to invest in a Target Date Fund based on the age of his beneficiary? If he has more than one beneficiary he can open up multiple IRAs name one beneficiary for each IRA and selecting the Target Date Fund based on the age of each beneficiary.

 

Moreover, I would demand that Prudential makes your friend whole. Tell them that this product never should be sold and was definitely unsuitable for a man age 75. Tell them if they do not make him whole you will give the case over to the appropriate governmental regulatory agencies. THIS ABUSE IS A NATIONAL SCANDAL AND MUST CEASE.

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Big red/Joel Frank,

 

Thanks for the replies guys. To be clear he's 76 but will turn 77 later this year. He could get a vanguard annuity, but vanguard does not offer annuities with a death benefit for people over the age of 75. Of course there is the market risk of losing his investment, but the other risk is if he should die soon after we make the switch in which case he might die before his account could make up that surrender fee.

 

If I were in his shoes knowing what I know I would drop the annuity, pay the surrender charge, and open a good ol' vanguard investment account and roll the dice on the market without concern about losing the principle. I've spoken to him about this, made him charts and tables and really tried to drive the point home, but I'm not in the business and so I'm sure he's taking my advice with a big grain of salt. Sadly, I've found some of the worst investment advice you can get is from the "professionals", but don't get me started....

 

It's a good point about the life insurance. He's already got enough, but if nothing else that would help me drive the point home about how much he's paying in fees. Rationally, you wouldn't need to cover your entire principle. You could just get enough life insurance to cover a terrible market crash, maybe enough insurance to cover half the principle, then compare that cost to how much he's losing in fees each year. I'll look into that.

 

Frank -- Well, to be clear, here's how the death benefit works, at least in this case with Prudential. The death benefit starts being equal with the initial investment amount. From there, it goes up whenever the market goes up and stays there. So if you put 10,000 in and the market gain get you up to $13,000 but then if falls back to $11,000, your death benefit will hold at $13,000 even though your account is less. Then, if you die, your beneficiaries get $13,000, not $11,000. Get it? If the market was very bad for a year or two, the Death Benefit would be substantially higher than the actual account value. You can imagine a situation where even without a surrender fee you are sort of trapped in the annuity because getting out would mean giving up too much money. He opened it in 2011 and we've had a couple good years in the market. Had it been bad year he probably wouldn't even be able to consider transferring it out. BTW, he'll be a 9% or 8% surrender charge for at least 3 more years!

 

I totally agree with the Target Retirement Fund comment. In his case, this money isn't something he needs. I try to explain to him that while this is HIS money, in terms of investing it he should think about it in terms of it being invested according to lifetime of his beneficiaries... in other words, more risk and more stocks. Be he's not buying. His allocation is currently 50/50 stocks bonds. So yeah, I agree but he's not into it. He's very risk adverse and wants some kind of protection on his principle.

 

Anyway, I agree it's unwise, but he's already in it. I also agree that these kinds of practices aren't as transparent as they should be, and I haven't even told you about the "income benefit" which is pretty sneaky in it's own right. Anyway, with this kind of death benefit, the death benefit will certainly be paid unless he takes it out early so I'm not sure if that changes your opinion. Do you really think this is something I could take to a government agency and maybe at least get him out of the surrender fee? I'm not interested in chasing windmills. I'm sure any "demands" I made of prudential would be met with laughter. He signed the contract and that's how they make their money.

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Guest Joel L Frank

Don't be so sure about Prudential laughing. These sales sharks do not like to answer the questions of regulators. I am willing to bet you will succeed on your friend's behalf. The US Department of Labor has addressed (see their website) the issue of buying an annuity for an IRA and frowns upon it. Use their exact words in your letter to Prudential. Address the letter, if you are so inclined, to the Chief Compliance officer at Prudential's home office in Newark N.J

 

Having said that, a person age 76 who has a 50/50 split between stocks and bonds is not "very risk averse". There is an emotional disconnect, when this kind of investor demands protection of his principal. The annuity you describe is allowing the buyer to have his cake and eat it---this is why it is not cost effective.

 

In closing I would like to know why your advice was not sought PRIOR to your friend's purchase of this annuity.

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Joel,

 

Thanks again for the reply. I don't know what the exact words were by the prudential people. The annuity was two years old when he told me about it

 

I find the world I live in people smart investing isn't such a revelation for most people. Having been burned many times myself before I saw the light, I try to talk to people I know about their investments, but people's finances are like religion and politics. They don't usually like to talk about it. Then when I tell them something like "you don't have to beat the market, you just have to try to match it for the lowest fees possible", they often look at me like I'm from Amway. Likewise with fees. In my friend's case, I spent a couple hours making a nice excel spreadsheet showing the impact of the fees and I even make a couple charts, etc. You can lead a horse to water....

 

But as for Prudential and filing a complaint, I don't even know what grounds I'd use. There's nothing illegal about selling someone an annuity. There's nothing morally wrong, let alone illegal, with having a death benefit when you're in your mid 70s'. My friend isn't all that concerned. I seem more worked up about it that he is. People just don't get it. I try to help but at some point I'm just being pushy.

 

So, no one has any suggestions for other companies I should call? I think I hit all the no-load companies I could think of....

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