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Seven years ago, when Alice Bouchard was 85 and needed her money to be easily accessible, an insurance agent sold her a deferred annuity that tied up her money until she was 101. If she had needed to withdraw the money during the first five years after buying the annuity, she would have paid a massive 25% surrender charge.
And if that weren't bad enough, the agent paid Bouchard regular annual visits and persuaded her to sell the annuities she had purchased in past years and buy new ones. Each time, she had to pay surrender charges. Then, she says, without her knowledge the agent began shifting money to other family members after she reached 90 (the maximum age at which you can buy an annuity from most companies).
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Bouchard, who lives in New Port Richey, Fla., and her daughter, Sister Carole Bouchard, a member of the Society of Sisters for the Church, eventually sought the advice of a financial planner, who contacted the Florida Department of Financial Services. Investigators discovered that Bouchard had paid more than $6,500 in surrender charges and taxes, and she had lost ownership of $293,000 that had been transferred to various members of her family. The agent had cleared $138,000 in commissions.
The agent preyed on Bouchard's fear of losing money by promising that she'd get the benefits of investing without the risk -- a typical ploy of salespeople who push unsuitable annuities, regulators say. And it's a ploy that seniors and people nearing retirement will encounter more frequently. As the tidal wave of baby-boomers begin to leave their jobs, taking with them hefty balances in their 401(k)s and IRAs, sales of annuity products will increase -- and so will the unscrupulous sales tactics that often accompany them.
Surrender charges on deferred annuities can cost investors 10% or more if they withdraw money or switch policies within the first few years. The charges decrease gradually over time, but they can remain for ten years or more -- and be in effect at exactly the time when seniors can't afford to tie up the money they need for living expenses or medical bills. "In general, these annuities are not a good product for older citizens," says William Galvin, secretary of the Commonwealth of Massachusetts. Galvin's office fined one bank $3 million for dishonest conduct in selling deferred annuities to seniors. It also required two banks to offer refunds to elderly customers.
But the longer the surrender period, the higher the commission, so agents have a big incentive for selling deferred annuities. Agents can earn as much as 4% to 7% up front, and as much as 5% to 12% on a specific type of annuity called an equity-indexed annuity. When a $500,000 IRA rollover can earn an agent an immediate commission of $60,000, it's easy to understand what motivates a hard sell.
In 2005, the North American Securities Administrators Association, the trade group for state securities regulators, cited dishonest annuity sales practices as one of the top ten threats to investors. The main problem, regulators say, isn't necessarily the product itself but the way it's sold. Agents often don't explain investment risk, fees or surrender charges. Even more egregious are cases in which agents have forged signatures, withheld key disclosure forms and lied about fees and potential returns. And, as in Bouchard's case, some agents churn clients' accounts -- moving money from one annuity to another while earning an additional commission each time.
The industry concedes that "there have been abuses in which annuities were recommended when they weren't appropriate," says Michael DeGeorge, vice-president and general counsel for the National Association for Variable Annuities. He says his group is committed to matching annuities with the right buyers. "An inappropriate sale can taint the entire industry," says DeGeorge.
How they work
To spot the problems, you have to know the basics of how annuities work. For starters, they come in two varieties: Immediate-income annuities provide income right away; deferred annuities allow investors to save for retirement while deferring taxes.
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