FUND TRACK Divorce Annuity-Fund Style: Leaving a Losing Contract
April 26, 2011
So you hate your annuity. It looked like a good deal when you fell for the little charmer: a basket of sexy mutual funds in a tax-deferred, IRA-like wrapper. Maybe from a big-name company. But you're older and wiser now. The funds are duds. You're getting scalped by fees. Maybe you're attracted to another variable annuity with great funds and low fees. Whatever. Yields on certificates of deposit at major banks and brokerage firms were mixed in the week ended Tuesday. Or maybe you're having second thoughts about your ``fixed'' annuity, which like a certificate of deposit, pays a set interest rate each year. Trouble is, the annuity teased you into it with a handsome ``come-on'' rate, but the annual interest rate was slashed in later years to some measly amount that makes you mad, say 4% or so. You'd rather move your money to a variable annuity with the potential for higher returns. Well, think a bit before you go wild. You could transfer the money to another annuity, but that could mean paying alimony (surrender fees) to get a fund divorce. You could also withdraw the money, but you'll owe income taxes, and possibly a 10% penalty. And you might also be hit with surrender fees. Still, there are ways to minimize the damage. Before doing anything, however, make sure you aren't dumping your old annuity just because some real nice person -- a broker, financial adviser or insurance agent -- says it's a dog. Some salespeople will tell you your annuity is a loser just to get you to move your bucks into an annuity they're touting. Unless the adviser is recommending a ``no-load'' variable from a few firms such as Vanguard Group, T. Rowe Price Associates Inc., Charles Schwab Corp., Scudder Stevens & Clark Inc., Jack White & Co. or USAA Life, he's probably going to earn a commission of 7% or so on the money. This happens a lot. Particular targets include teachers, retirees and nonprofit employees. As much as a third of what are reported as ``new annuity sales'' are actually transfers from one variable annuity to another. Especially hard-hit has been Scudder Horizon, a variable annuity with no surrender charges. Scudder has watched a ton of its money migrate into American Skandia's annuities, thanks to brokers and advisers who convinced investors that the Skandia annuity is a better deal. Scudder doesn't want to talk about it. Lindsey Stuart, senior vice president for product management at American Skandia Life Assurance Corp., in Shelton Conn., says his firm doesn't track whether money transferred into its annuities comes from no-load annuities like Scudder's. But if it is going this route, he says, it's probably because advisers who charge their clients an annual fee (instead of commissions) are switching investors into American Skandia's Advisor's Choice, which has no surrender fees. Mr. Stuart says that when it comes to transferring to another annuity, ``they need to ask, customers and brokers, whether it's in their best interests to do that.'' Make up your own mind. If you're thinking of getting hitched to another variable annuity, get the facts first, perhaps from Morningstar Inc. in Chicago. It provides a guide that shows how the expenses and performance stack up. Here's the drill: You could withdraw your money, paying income taxes on the earnings, plus a 10% penalty on earnings if you're under age 59 1/2. That's just like your IRA. If you have no earnings (maybe that's why you want out), there's no problem. You won't pay a 10% penalty if you're permanently disabled, terminally ill or withdraw the money in a series of payments based on your life expectancy. You may also owe surrender penalties. These are prenuptial agreements between you and the folks who sold you the variable annuity. The agreements dictate that if you exit early, you're still on the hook for commissions. These are typically 7% of your investment in the first year, declining by one percentage point a year over seven years. Variable annuities sold in retirement plans may have surrender charges that top 10% and last a decade or more. If you bought the variable annuity years ago, there may be no surrender charges on it by now. But beware: Many annuities start the surrender charge ``clock'' on each dollar, as you put it in. This is sometimes called a ``rolling'' surrender charge. What it means is that if you invested some money this year, it will be seven to 10 years before you could take that money out without paying a surrender fee. Many variable annuities have features that let you withdraw as much as 10% of your balances each year without paying a surrender charge. But you'll still pay taxes and a 10% federal penalty on any earnings. If you want to move your money to a different variable annuity, and surrender charges aren't an issue, you can avoid taxes and penalties by making what tax experts call a ``1035 exchange.'' Your new variable-annuity seller will give you the paperwork and arrange the transaction. Because of a wrinkle in the retirement-plan rules, teachers (kindergarten through 12th grade) can transfer to a variable annuity even if it isn't on their employer's menu of choices. Few teachers realize they can do this. School administrators are clueless. But many brokers have discovered this fact and are targeting teachers to get them to move their money. Since teachers often have rotten annuities, this might be a good thing to consider. Teachers can also transfer their money to mutual funds, including no-load funds. They just have to open a custodial 403(b) account, which is offered by most major fund companies and insurers, and many brokerage firms and banks. The new provider will arrange the tax-free transfer. Even some employees of nonprofit companies can do this. If there's nothing in the retirement-plan document that prohibits these ``in-service'' transfers, they can transfer their annuity money to someone else's annuity or into a mutual fund. The IRS says so. As long as the money goes into an annuity or a mutual fund within a custodial 403(b) account, you won't trigger taxes. Just watch out for surrender fees if you want to enjoy the honeymoon. GOLDMAN'S SEARCH: Goldman, Sachs & Co., in a bid to bolster its asset-management business, is in preliminary talks to buy Liberty Investment Management, people familiar with the situation say. Liberty officials couldn't be reached for comment. A Goldman spokesman refused to comment on the specific deal, but said it is always looking at opportunities to strengthen its asset-management business. The talks come just a month after Goldman acquired British pension manager CIN Management Ltd. for about $70 million. Liberty Investment, based in Tampa, Fla., has about $4.9 billion assets under management, according to Pensions & Investments magazine. -- Anja Falcon
