Long Live The 20% Surrender Charge....

These days you'd think that excessive surrender periods and surrender charges would be gone, after all, didn't Eliot Spitzer clean up the financial services industry?

Unfortunately there are still many unscrupulous individuals and companies who sell fixed annuities that have low returns, high surrender charges, and long surrender periods. Much of the time the products are not fully disclosed. Not only that, but the products are sold by Certified Financial Planners (of which I am one). It seems that these days you can't even trust "the most trusted designation in the industry."

Recently I met a school employee who had worked in the past with a company by the name of Zuk & Associates. I have come across Zuk many times in the past and so far have never seen anything from them that impresses me. Zuk's idea of diversification during the tech bubble was to own five different Janus funds (if you don't believe me I can show you the statements). Zuk was also against AB 2506, the legislation that created a full disclosure databank online at www.403bcompare.com (I have copies of the letters they sent to client lying about the bill).

Zuk sells a lot of products from Great American, but also products from companies like AVIVA and even occasionally mutual funds. In this instance the school employee was sold several fixed annuities. Each had 10-12 year surrender periods and one (from AVIVA) had a surrender charge that started at 20%. Another of the products had a "bonus" that was supposed to make up for surrender charges in another product that the employee was told was possibly having financial problems (a whole other story). The bonus however doesn't show up until the 5th year and even then the employee doesn't actually get to keep the bonus until the 12th year. In addition, the bonus is reduced if withdrawals are made, considering the client was at retirement age when the product was sold it is unlikely the employee will ever see the bonus.

What is wrong with the 403(b) industry? I would say that these product sales were isolated instances, however when I look up who is behind the National Tax Sheltered Accounts Association (the trade organization for 403(b) agents) I find AVIVA and Great American as two of the major sponsors. The other sponsors aren't exactly pillars of wonderful products either. This indicates to me that poor products are not the exception, but the rule.

What is clear is that something needs to be done to clean this up. Selling a fixed annuity with a 20% surrender charge isn't illegal, however it is unethical, especially if it isn't properly disclosed. It is time that a new system is put in place, a system that takes the best of the 403(b) world and the best of the 401(k) world and combines it, who will do this?

School employees - it is up to you to take better care of your retirement, you are being taken advantage of every day and don't even know it. It's not all your fault, but now there are resources to help you like www.403bwise.com and www.403bcompare.com and hourly based financial planners. It is up to you to approach your union and districts and demand that they take responsibility for their retirement plans.

Scott Dauenhauer, CFP, MSFP