Caution: TSA Transfers Can be Costly
By Bob Moeller
WEAC Member Benefits
February 2005
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About a month ago, I met with a member who was concerned
about tax-sheltered annuity transfers she had made after retirement.
First, she transferred from a perfectly fine TSA to an
insurance company TSA with new, high withdrawal charges that the salesperson
did not fully tell her about. To make things worse, a couple of years
later she was talked into transferring out to another insurance company
while still in the middle of her penalty schedule with the second company.
So she was going to pay a high penalty moving from company two to company
three, and then have another high penalty if she transferred out of
the new company within several years.
Why did she make the last transfer? Because the insurance
company gave her a “bonus” payment, and assured her she
would earn more with their product. She knew she had made a mistake
with each of the transfers, but assumed there was nothing she could
do about it.
Fortunately, in this case there was.
As part of any deal regarding an insurance product like
a tax-sheltered annuity, you have a 30-day “cooling off”
period, and this member had only signed for the final transfer about
20 days earlier. I recommended that she rescind her final transfer and
helped her prepare the necessary letters. Her second company agreed
to take back the money and credit her account in full, including the
withdrawal penalties they had extracted.
I frequently read about how government agencies are investigating
insurance company practices of selling new annuities to people by replacing
their old annuities, even if their old annuities are fine. Why do they
do this? For the commissions, pure and simple.
I constantly see examples of this, even cases in which
the same insurance agent who sold the original policy now swaps for
a new policy and generates more commissions. I regularly warn people
to not let their own insurance agent talk them into any new products.
Yet, sometimes your TSA can be greatly improved upon by
transferring it to a new product. If you have a high-cost, low-reward
product, you should be looking for an opportunity to transfer it to
a better product. But, you have to determine which product is better
yourself, not just listen to some trained salesperson whose living comes
from commissions. Rule: There is no good financial reason to invest
TSA contributions in a product that has surrender fees or mortality
fees. Read that last sentence again.
Here are some questions you should demand answers to (preferably
in writing) before you decide to transfer money to a new product.
- Am I paying a transfer penalty to the old company? How much is
it? When will it go to 0%? Are you proposing that I just transfer
out money that comes out with no penalty?
- What transfer penalties will I have with the new product? What
is the exact schedule? Show me that schedule in my prospectus so I
can note it.
- How much will I be paying for life insurance in the new product?
Or, what is the mortality (life insurance) and expense (cost of administering
the policy) fee? Show me that detail in the prospectus. If I invest
over the years $20,000 and it has grown to $50,000, how much will
each fee be that year, and what life insurance benefit will I get
for that fee if I die? Show me that in the prospectus.
- Besides possible withdrawal fees, mutual fund (sub-account) fees,
and mortality and expense fees, what other fees will I be paying?
What is the total overall expense percentage I will be paying? If
I’ll be investing in a load mutual fund, what class fund are
you suggesting and what are the fees? (Don’t buy any baloney
about Class B mutual funds not having any sales charges.)
So far, we have talked only about the product. Now let’s look
at some questions and comments you should address about investments:
- Give me a sheet of every sub-account (mutual fund) I can invest
in, how that account has performed for one year, 5 years, and 10 years,
and how that performance compares to the appropriate benchmark index
fund and/or comparable investments. Give me the Morningstar rating
of each of these choices.
- Do you have a fixed-interest guaranteed investment? What is it
paying for 2005 after all expenses?
- Who is the manager of the sub-account and how long has he or she
been the manager?
- How can I track the performance of these investment accounts?
- Are there restrictions or fees for moving money among the investment
accounts?
Posted February 1, 2005