Help with Proposed Annuity Swap

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Help with Proposed Annuity Swap

Post by ARBear » Thu Dec 01, 2011 6:47 pm

Hi Bogleheads,

My spouse and I posted last month and got some good advice. We're working our way through The Bogleheads' Guide to Investing and so far we're enjoying it. Now we have a question for a family member that we can't answer, but thought maybe you could.

Our family member purchased a Hartford Select Leaders annuity in 2002. Like a lot of new investors, she did not know what an annuity was, the broker simply said it would take care of her beneficiaries. The broker who sold her the annuity later left the brokerage and the broker who inherited her account said he called Hartford, talked to them for 2-3 hours about the annuity, and told her that she should never sell it because it was such a good annuity that Hartford had quit selling it.

She later left the brokerage because of churning in her account (losses of over $400,000) and moved to a different one in 2009.

Her current broker called and advised her that she should swap her current annuity for a Prudential HD Lifetime Income annuity.

Our family member wasn't sure what to do, so she asked one of us (a beneficiary) to contact the broker and ask him some questions. So today we called and asked some questions that we read in the Wall Street Journal Complete Personal Financial Guidebook (which, btw, advised to avoid a swap at all costs). We asked if there would be new surrender fees (answer: no), any fees for swapping (answer: no), asked why the swap and why now (was interrupted and told that Hartford annuity did not guarantee a life benefit), and what his commission/compensation would be (answer: Wells Fargo puts the money in an account and he never looks at it). Then the broker got upset and said if our family member couldn't trust him, then he suggested she get a new broker.

My spouse and I watched a video on the Prudential website about this HD Lifetime Income annuity and it said that there would be income growth until the first withdrawal, then it no longer uses the "daily high capture," and instead uses the anniversary date to determine the value. Her current Hartford uses the anniversary date method.

Our family member says she doesn't plan on making any withdrawals from the annuity unless she has to. At this time she does not, but one never knows what will happen in the future.

Also, she does not have a fee-based planner in her area, so that option is out. Her CPA (who is also a CFP) is good friends with the broker in question, so she is unsure if she would get an unbiased opinion from him or not, but she did talk to her CPA and he thinks it's a great deal.

So what do you think Bogleheads? Should she agree to the swap or keep what she has? Do you have any experience with either of these annuities? If you have any advice whatsovever, please let us know.

Thank you very much in advance.

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Re: Help with Proposed Annuity Swap

Post by Mel Lindauer » Thu Dec 01, 2011 7:46 pm

Is this annuity in her tax-deferred (IRA, 401k, 403b etc) account, or is it in her taxable account?

Obviously the new broker wants to switch her to the new annuity so s/he can get a new commission. The new broker won't get paid if she holds on to the old one because the previous broker already got paid for that sale. While the new annuity is good for the new broker, it's most likely not good for the investor. And a new annuity comes with a new surrender period.

She made one mistake and now she's being set up to make the same mistake again. Let's get more information so we can offer informed opinions.
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Re: Help with Proposed Annuity Swap

Post by Brody » Thu Dec 01, 2011 7:52 pm

Some quick thoughts/questions. I'm sure that I'll have more to add to some of the other responses that you get:

1) The current broker needs to be fired immediately. If she continues to work with him and gets ripped off, she deserves it. I say this because dishonest people are dishonest and shouldn't get a second chance. The broker is a liar.

2) Is this qualified money or unqualified money? Is she older or younger than 59 1/2?

3)Forget about talking to the CPA. Despite him being a CPA and a CFP if he isn't intimate with your relative's financial goals, he has no way of knowing if the product makes sense. Products are not good or bad. They are appropriate or inappropriate.

4) If the PRIMARY goal is not to maximize the least amount of future income that your relative will get, the product is inappropriate.
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Re: Help with Proposed Annuity Swap

Post by patrick » Thu Dec 01, 2011 7:58 pm

I would suspect that both the old and new annuities have very high fees, so the swap would just be exchanging one high fee investment for another.

To get better advice, it would probably help if you provide more details about the old annuity, such as:

1) What is the total amount of fees being charged on the old annuity? This would likely be a combination of the basic annuity fee, subaccount/investment fees, and extra fees for optional riders.
2) Does the old annuity have a significant gain or a loss? That is, is the current accumulated value more or less than the total amount invested in it minus the amount (if any) already withdrawn?
3) Does the old annuity have a death benefit that currently guarantees more than the accumulated value? That is, is the amount that would be paid to beneficiaries on death significantly more than the amount you'd get by withdrawing now?

General suggestions would be:

1) If there is a lot to gain from the death benefit keeping the old annuity might be worth it. For instance, if you had invested 300K but the value is down to 200K but a death benefit guarantees getting at least what you put on upon death, it could be a good idea to keep it for now (but if the value ever recovers to 300K then it's time to get out of the old annuity).
2) Otherwise, if there is a large gain in the annuity you might want to keep money in an annuity to keep it tax deferred, but it would be best to switch to a low cost annuity. This would probably mean an exchange to the Vanguard annuity, not a higher cost one from Prudential. Likewise, if you really wanted a lifetime income benefit.
3) In any other case, it would probably be best to take it out and invest outside the annuity to avoid the annuity fees.

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Re: Help with Proposed Annuity Swap

Post by mephistophles » Thu Dec 01, 2011 8:15 pm

To keep it simple, IMHO do not replace your existing annuity with the Prudential annuity. The so-called swap is a 1035 exchange and the only one to benefit is the selling broker who earns a big fat commission.

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Re: Help with Proposed Annuity Swap

Post by ARBear » Thu Dec 01, 2011 8:18 pm

Hi Mel, Brody, and Patrick -

Thank you for your response. I thought I posted a reply earlier, but maybe it misfired.

To Mel - It's in her taxable account.

Here is additional information that may help: The initial purchase price for the Hartford Selected Leaders annuity in 2002 was $100,000. When my family member moved to her new brokerage in 2009, the broker said that the annuity was "underwater" and got rid of the old funds in it for all large cap funds. He told me on the phone that this new Prudential annuity would allow her to "lock in her gains" and that there would not be new surrender charges.

To Brody: I'll pass on your advice on firing the broker and the CPA. Second, I don't know if it's qualified or unqualified money, but I can tell you that she is older than 59 1/2. My impression from the broker on the phone was that he believes this would allow her to "lock in her gains" since the annuity has risen somewhere around $130,000 with the market.

To Patrick: Your first set of questions are very helpful. I will have to get a copy of the contract and/or prospectus to see what the fees are. I assume it would probably be easier to have my relative call Hartford and ask. As far as I have been told, the annuity was $100,000 initial investment and is somewhere around $130,000. So far she has not withdrawn any money from the annuity. I will need to find out about the death benefit.

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Re: Help with Proposed Annuity Swap

Post by BruDude » Thu Dec 01, 2011 10:58 pm

New broker either doesn't know the difference between an income rider and base annuity or is deceiving in his explanation. Gains are never locked in with a VA, otherwise it wouldn't be variable. Fixed annuities lock in gains.

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