Did I Make the Right Decision on Annuity

[Nate insurance]

I have a client that is 55 years old and she retired from Verizon. She had $319,000 to rollover and needed immediate distributions. So I put her into a 72t with AG Global Bonus Index. The product offered a 4% bonus and she does not have to be vested for bonus. I put 80% into a monthly addictive account with cap and 20% into annual point to point. The monthly cap is 1.8%. Client is worried about not touching any principal. So with the bonus and averaging how the product will perform in the next 10 years, do you guys think this was a good decision as far as not affecting any principle??? Thanks Also, her 72t income is about $1350 per month.

 

[golfnut]

Do you think the product will average a 5-6% annual return? Because you will need that level of return to maintain the principal balance over time. At this point in the market cycle I don't think the monthly pt to pt strategy will yield an above avearage return. I don't like that strategy unless the cap rate is above 2.5-3% range. Just too hard to get a positive return. My opinion is that she will use some of the initial premium. Hopefully, you disclosed that to your Client.

 

[scagnt83]

Do you think the product will average a 5-6% annual return? Because you will need that level of return to maintain the principal balance over time. At this point in the market cycle I don't think the monthly pt to pt strategy will yield an above avearage return. I don't like that strategy unless the cap rate is above 2.5-3% range. Just too hard to get a positive return. My opinion is that she will use some of the initial premium. Hopefully, you disclosed that to your Client.

I have to agree. If you run 10 year historical models on a 1.5% Monthly Cap, you will see a low of 1% and a high around 5%. The median is around 2.5%.


For $319k in assets, she will need a 4.3% return per year to not touch any principle. So the odds are against her.

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I have a client that is 55 years old and she retired from Verizon. She had $319,000 to rollover and needed immediate distributions. So I put her into a 72t with AG Global Bonus Index.


Thanks Also, her 72t income is about $1350 per month.

Is AG administering the 72t payments? ie. did they do the calculation and did they set up automatic SEPP payments for her?

 

[DHK]

I have a client that is 55 years old and she retired from Verizon. She had $319,000 to rollover and needed immediate distributions. So I put her into a 72t with AG Global Bonus Index. The product offered a 4% bonus and she does not have to be vested for bonus. I put 80% into a monthly addictive account with cap and 20% into annual point to point. The monthly cap is 1.8%. Client is worried about not touching any principal. So with the bonus and averaging how the product will perform in the next 10 years, do you guys think this was a good decision as far as not affecting any principle??? Thanks Also, her 72t income is about $1350 per month.

You've got a big problem. One large enough to be sued over. At minimum, a complaint to the insurance company.

Did you know that one could take penalty-free distributions DIRECTLY from one's Qualified Plan (not including an IRA) as long as:
- You are separated from service
- You are 55 or older when you separate from service.

Yes, I've seen complaints like this before... with retirees from AT&T and Verizon. (I used to work as a financial advisor at a credit union that had these companies as "SEG" groups.)

This means that you need to materially demonstrate how your recommendation of a rollover, being locked into a 72t distribution schedule makes your client better off than just taking income directly from the 401k.

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http://www.irs.gov/pub/irs-pdf/p560.pdf

See page 20:

Exceptions. The 10% tax will not apply if distributions before age 59 1/2 are made in any of the following circumstances.

Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.

 

[scagnt83]

You've got a big problem. One large enough to be sued over. At minimum, a complaint to the insurance company.

Did you know that one could take penalty-free distributions DIRECTLY from one's Qualified Plan (not including an IRA) as long as:
- You are separated from service
- You are 55 or older when you separate from service.

Yes, I've seen complaints like this before... with retirees from AT&T and Verizon. (I used to work as a financial advisor at a credit union that had these companies as "SEG" groups.)

This means that you need to materially demonstrate how your recommendation of a rollover, being locked into a 72t distribution schedule makes your client better off than just taking income directly from the 401k.

Good point. I didnt even notice that he said he rolled it out of a 401k just to do the SEPPs.


Hopefully he at least informed the client that any withdrawal over (or under) the SEPP amount will break the 72t qualification and she will be penalized. It must also be for at least 5 years.


Hopefully AG or a qualified CPA/TPA is administering the 72t distributions.... if not it could be a really bad situation!

 

[DHK]

As long as it's a valid calculation using a maximum of 120% of the Federal mid-term rate, and she doesn't change or interrupt the distribution payments... it should be fine.

 

[golfnut]

Any Company that handles 72t will do it properly, so the Client will not have an issue from that angle. The problem that I see is this is not the best product for this situation. When you have situations like this pick the best short term product with the highest accumulation potential. I am not famaliar with the AIG product mentioned, but assuming that is a total cap product based on the comments. I don't think there would be a compliance issue as long as you established that she wanted safety of principal with a chance to maintain principal and that it was disclosed that this product WOULD not maintain all of the orginal principal and that you documented the safe options available within her previous plan. I highly recommend case notes be taken.

 

[scagnt83]

As long as it's a valid calculation using a maximum of 120% of the Federal mid-term rate, and she doesn't change or interrupt the distribution payments... it should be fine.

The problem comes when the client does not understand the restrictions around the payments.

We recently had a thread on here where a consumer posted about his tax mess dealing with SEPPs that had been broken.

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Any Company that handles 72t will do it properly, so the Client will not have an issue from that angle.

Yes, but not all do. Most major players do, so I would guess that AG does.

But I have encountered people who have used an accountant or CPA to do the calculations, the cpa was not well versed in the regs surrounding 72t (or the person just did not consult with the cpa before doing something with the money), and then they get hit with the tax penalty.

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The problem that I see is this is not the best product for this situation. When you have situations like this pick the best short term product with the highest accumulation potential.

Definitely not the best product. Especially when the client needed growth to preserve principle. Much higher Caps out there to be found.

 

[DHK]

I don't think there would be a compliance issue as long as you established that she wanted safety of principal with a chance to maintain principal and that it was disclosed that this product WOULD not maintain all of the orginal principal and that you documented the safe options available within her previous plan. I highly recommend case notes be taken.

The 401k's money market fund - while not 'contractually guaranteed' - is one of the safest places to put your money within a 401k... just not nearly as good of a potential 'upside' with it.

They key to avoid a complaint is to document the annuities features that are not available within a 401k and these features were the reason to roll the funds over and lock into a 72t distribution schedule.

 

[scagnt83]

The 401k's money market fund - while not 'contractually guaranteed' - is one of the safest places to put your money within a 401k... just not nearly as good of a potential 'upside' with it.

They key to avoid a complaint is to document the annuities features that are not available within a 401k and these features were the reason to roll the funds over and lock into a 72t distribution schedule.

The problem is that we do not know what the client's need is.

What was the income need? Then only can we judge suitability.


But unfortunately there are few situations that being locked into structured payments for 5 years, and loosing all access to the rest of your funds without triggering tax penalties, would be a better situation.... it would have to be one hell of a product.... which this definitely is not. (most bond funds will outperform it easily)

Did the agent check to see if the 401k would accept Annuities as a funding option? If not, then that could spell trouble even if the Annuity was a better investment vehicle.

If she could have bought the annuity within the plan then that would have been a substantially better situation.
And if he did not check to see if that was a viable option for her, then he did not do his due diligence.

If it was just insurance law at hand in this situation he would be ok.
But unfortunately we are dealing with DOL regulations/ERISA.

Anytime you even rub up against a 401k plan you are held to a fiduciary standard. Which means "best possible", not just "suitable". And failure of due diligence is one of the top 3 ERISA lawsuits these days....