Seniors Get a Hard Sell on Fee-Laden Annuities

Maydeen Tharp wanted a living trust. She wound up buying a $230,000annuity.

Tharp, a widowed homemaker, had invited an insurance man to herhome in Upland to get her estate in order. The salesman shifted theconversation to a different subject: annuities. Then he askedwhether they could move outside to the back patio, so her catswouldn’t trigger his allergies.

The salesman talked for hours. The November afternoon grew coldand dark.

Finally, Tharp gave in. She agreed to move the bulk of herretirement savings into an annuity.

“He was so talkative he could sell you anything,” recalled Tharp,69. “After five hours, I was so tired and cold, I just wanted tomake him go away.”

Tharp had second thoughts the next day and was able to get hermoney back with help from her financial advisor. Thousands of otherelderly Americans have not been so fortunate.

Investment brokers and insurance agents are selling annuities tothe nation’s 36 million senior citizens at a furious clip, oftenthrough deceptive or high-pressure tactics. Annuity sales reached$217 billion last year — nearly triple the level of the early1990s.

Using come-ons honed by marketing experts, unscrupulous agentsplay on seniors’ fears by suggesting that stock mutual funds, evenfederally insured bank accounts, are too shaky to depend on. Theydepict annuities as a secure alternative without explaining theaccompanying fees and restrictions.

Some sales agents offer estate-planning services or free financialworkshops for seniors to gain access to their financialinformation. Then they zero in on those with sizable assets,delivering a hard sell for annuities regardless of whether theymeet the clients’ needs.

Annuities are contracts that promise fixed or variable payments inthe future. Salespeople sometimes omit mention of the “surrender”charges that apply if buyers withdraw more than modest sums in theearly years of an annuity.

Murray H. Cheves, a 90-year-old retiree from San Luis Obispo,bought a $100,000 annuity in 2001 with exit penalties that lasted10 years. Cheves would have had to live to 100 to have unfetteredaccess to his money.

Instead, he died at 91, and his heirs were slapped with an $11,000surrender charge.

“Our older citizens, understandably concerned with rising livingand medical costs and even pension uncertainties, are beingtargeted by unscrupulous financial predators,” said William F.Galvin, Massachusetts’ top securities regulator, who has brought astring of complaints against annuity providers.

The NASD, the brokerage industry’s regulatory arm, has filed 286enforcement actions over annuity sales in the last six years— including 88 in the 12 months that ended in November, themost ever for a single year.

In a case settled last year, the NASD accused Waddell & Reed, aKansas-based brokerage with offices across the country, of proddingthousands of clients to transfer their annuities from one insurancecompany to another. The reason: The new insurer had agreed to givethe brokerage a bigger cut of revenue, according to thecomplaint.

Waddell & Reed urged sales agents to disparage the originalinsurer, questioning its financial strength and its commitment tocustomer service, said the NASD, formerly the National Assn. ofSecurities Dealers.

Customers switched 6,700 annuities to the new provider, generating$37 million in commissions for Waddell & Reed and its brokers.Investors, meanwhile, paid $10 million in early-withdrawalpenalties.

Waddell & Reed paid $16 million to settle the case, along with$3 million to resolve similar suits brought by authorities in sevenstates. Two of the firm’s executives were fined and suspended aspart of the settlement. The brokerage, which neither admitted nordenied wrongdoing, declined to comment.

In California, state authorities and irate investors have accusedsubsidiaries of AmerUs Group Co., an insurer based in Des Moines,of using scripted pitches to frighten seniors into moving theirsavings into annuities.

A sales trainer, testifying in one lawsuit, said agents werecoached to bad-mouth the Federal Deposit Insurance Corp., whichinsures bank deposits, by saying that the agency “had troubles” inthe early 1990s and could take as long as 20 years to repaycustomers if a bank failed.

To avoid leaving a written record of these tactics, the trainersused a chalkboard rather than handouts, said Rob Gianelli, a LosAngeles attorney for the plaintiffs.

In a recent settlement of that suit, an AmerUs subsidiary agreed,among other things, to reimburse seniors for fees they incurred byswitching annuities. Settlement talks are continuing with thestate, which is seeking more than $110 million in fines andrestitution.

Guaranteed Income

Regulators say deceptive practices are driven by the prospectof rich commissions. On a $100,000 annuity, the agent’s taketypically runs $3,000 to $10,000, although it can reach $16,000,according to industry experts.

“In many cases, the agent or broker ignores the senior’scircumstances and locks him into an inappropriate annuity, and fatcommissions are the motivation,” said California InsuranceCommissioner John Garamendi.

Annuities allow people to shield retirement savings from taxes foryears and then receive regular payments, much like a pension. Wheninvestors die, their estates generally can get lump sums equal toat least what they contributed.

Surrender charges, however, can be in force for up to 20 years.During that period, investors who take out more than 10% of theirmoney in any year can be subject to steep penalties. In addition,investment gains are diminished by commissions paid to sales agentsand by fees for insurance features.

Proponents of annuities say abusive sales practices are far lesswidespread than regulators contend. They say their products makesense for many older Americans.

“The people who are doing right in this industry are not greedywith their earnings, and the great majority of us don’t buymansions and Jaguars at the expense of seniors,” said Mark Kennedy,a Woodland Hills financial advisor who is a member of the insuranceindustry’s Million Dollar Round Table of top sales producers.

Los Angeles billionaire Eli Broad, who founded SunAmerica Inc.,one of the nation’s biggest annuity providers, notes that theproducts are unique among investments because they can provideguaranteed income for life.

“People are living how many years now? If they start investing at65, they need a variable annuity more than they need a mutualfund,” said Broad, 72. “They need a guarantee that if something badhappens to the stock market, they or their heirs will get theirmoney back.”

But Broad conceded that people of advanced age should be leery ofannuities. An 85-year-old, for example, might see only a few monthsof payouts — and withdrawing money early for medical care orother emergencies could trigger penalties.

Rita Steinberg was 78 when a salesman for Family First AdvancedEstate Planning, an AmerUs subsidiary, prepared a living trust forher in May 2000.

A month later, the salesman returned to Steinberg’s San Joseapartment and sold her a $156,000 annuity, according to a suitfiled by her son, Stephen, a software engineer.

That August, another Family First agent sold her a second annuityfor $200,000. A year later, Stephen Steinberg was visiting hismother when three Family First agents arrived to update hertrust.

Steinberg, 53, said his mother treated the trio “like family,” eveninviting the female agent to stay with her. Steinberg said theagents had ingratiated themselves by giving his mother giftsincluding a teddy bear and a small safe.

A few months later, Rita Steinberg spent the last of her savings— $89,000 — on yet another annuity from FamilyFirst.

Her entire nest egg, more than $400,000, was now tied up inlong-term annuities. Then her health declined and she moved into anassisted living facility. Strapped for money, she cashed in one ofthe policies, incurring a $31,000 penalty.

Her son has sued Family First and the annuity issuer, AmericanInvestors Life Insurance Co., also an AmerUs subsidiary.

“My mother and other seniors continue to be charmed and deceived,”Steinberg said.

An AmerUs Group spokesman, Marty Ketelaar, said the company had”strong defenses” against the suit but declined to commentfurther.

Feeling Pressured

Hazel Hauswedell, 73, said the man who sold her two annuitieswas plenty charming — at first.

Hauswedell, a retired sales manager for a music store, said she metBarry Baricza in December 1999 while waiting for her Ford Taurus tobe serviced at a repair shop.

Baricza dropped by her trailer home near Palm Springs. He treatedher to lunch. When she talked about the difficulty of living on afixed income, he said he had the answer: an annuity that could growin value and provide steady payouts.

Hauswedell, a widow whose husband had handled the family finances,put $70,000 of her savings into an annuity, according to a suit shefiled against the agent and the insurer, Conseco Inc. When Bariczareturned weeks later and urged her to buy another, sheresisted.

“I decided, ‘I don’t better put all my eggs in one basket,’ “Hauswedell said. “He got very upset.”

She said Baricza picked up her phone, asked for the number of herbank and dialed it. When a bank employee answered, she said, hehanded her the phone and she reluctantly ordered a $67,000 transferto buy the second annuity.

Hauswedell said she felt pressured to make the investment and didnot understand its restrictions, including penalties of up to 20%for early withdrawals. She received no immediate income from theannuity and later had to draw down her principal to make ends meet,she said.

Conseco, based in Carmel, Ind., and Baricza denied the allegationsbefore reaching settlements with Hauswedell last year. Baricza saidthe agreement barred him from discussing the matter.

Hauswedell, who now lives in Bakersfield, described her dealingswith Baricza in interviews conducted before she entered into thesettlement.

“I thought he was my friend and he was advising me right,” shesaid. “I found out later he was just in it for thecommissions.”

A $50,000 Exit Fee

Nancy Clark was 83 when she bought a $125,000 annuity from NationalWestern Life Insurance Co. in 2002. Her son, James, said she was inthe early stages of dementia and mistakenly believed she would haveaccess to all of her money if she had to enter a nursing home.

In fact, she would have to pay surrender fees of 25% if she tookout more than 10% of her savings in any year during the first sixyears of the contract.

James Clark, a retired building inspector from San Bernardino, saidhis mother told him about the annuity not long after she purchasedit. Clark said he was alarmed by the withdrawal charges and calledthe salesman, Ezra Chapman, to find out more.

The first conversation was “fairly mellow,” said Clark, 58, who issuing Chapman and the insurance firm. But a follow-up call turnedugly.

“He became very irate on the phone, very vulgar, threatening, saidI was crazy,” Clark testified in a deposition.

By the time his mother died in 2004, the annuity had grown to$198,000. But Clark didn’t get that amount; he had to pay a $50,000surrender fee.

Garamendi’s office recently joined the suit on behalf ofCalifornia consumers, claiming a pattern of sales abuses byNational Western.

Chapman’s lawyer, Jim Williams, said his client “did not violateany law” and that there was no evidence Nancy Clark was mentallyincompetent when she bought the annuity.

Kent Keller, an attorney for National Western, said James Clarkcould have avoided the surrender charge by taking the money overeight years instead of in a lump sum. He scoffed at the notion thatelderly people are easily deceived.

“Mike Wallace is 87,” Keller said. “Paul Newman is 80. Ruth BaderGinsburg is 72. All these people seem to be fully functioning,thank you.”

‘Doing the Right Thing’

In retirement communities around the country, seniors with timeon their hands, money in the bank and a soft spot for free mealsare bombarded with sales pitches at breakfast, lunch anddinner.

Financial advisor Kevin McEnerney works Florida’s Space Coast,talking up annuities over lunch at the Chart House restaurant inMelbourne.

One day last summer, he told a group of 20 seniors enjoying lunchat his expense about a “wonderful” annuity from AmerUs Group thatpaid interest tied to a stock market index.

“Annuities have gotten black eyes, but this is a good way tobalance your money,” McEnerney said. “It gives you a better returnthan a bank CD and yet it can grow.”

Because the investor’s principal is guaranteed, he added, theannuity provides a safety net: “If we’re out there swinging for thefences with our retirement money and we strike out, what couldhappen?”

Before the salmon entrees were brought out, McEnerney invitedattendees to visit his office for personal consultations.

“We treat our clients like family,” he said. “If you don’t likecoffee and fresh-baked cookies, then our office is probably not agood place for you.”

Dorothy “Dot” Eddy, 72, took him up on his offer after attendingone of his Chart House seminars in 2004. Eddy put $156,000 in anannuity that provides monthly checks of $475 to supplement herSocial Security income.

She said McEnerney persuaded her to purchase the annuity within herindividual retirement account, playing up its tax advantages. But,she said, he didn’t tell her she could get stung with surrendercharges starting at 18% if she withdrew more than 10% of theprincipal in any of the first three years.

Eddy also said McEnerney failed to mention that the annuity’s taxdeferral was essentially worthless to her, because her savingsalready were protected from taxes in an IRA.

“I was very vulnerable and I got taken in,” said Eddy, aretired middle manager for an electronics maker.

Eddy has sued AmerUs Group, alleging deceptive sales practices. Herlawyers are seeking class-action status on behalf of thousands ofFlorida seniors who bought similar AmerUs annuities.

AmerUs said it took Eddy’s complaint seriously and would “work toresolve it as promptly as possible.”

McEnerney, who is not a defendant in the suit, said that theannuity was a sound investment for Eddy and that he had explainedits terms in detail.

“If I were one of those guys who doesn’t follow the rules, I’d bescared, but this doesn’t bother me,” he said. “You have to look inyour heart and know you’re doing the right thing.”

States with sizable elderly populations have adopted investorprotections in recent years.

Florida requires agents to document the basis for any annuity saleto a senior, including a review of the client’s financial goals andtax status. In addition, the Securities and Exchange Commission andthe NASD are working with Florida regulators to ensure that brokersand financial advisors give truthful presentations at seminars forseniors.

Arizona gives annuity buyers age 65 or older a “free look” at thecontract, allowing cancellations for any reason within 30 days.

A California law passed in 2004 mandates special training forannuity sellers who market to seniors and requires new disclosures.Before visiting a senior’s home, for instance, agents must providenotice in 14-point type that a sales pitch is coming.

But even lawmakers who have taken on the industry say more needsto be done. State Sen. Jack Scott (D-Altadena), who wroteCalifornia’s 2004 law, is pushing a bill that would force insurersto adopt “suitability standards” for all annuity sales toseniors.

Scott said he had heard complaints about dubious sales practicesover the years, but a relative’s experience drove home theproblem.

His wife’s uncle, a former BF Goodrich executive, was in his 90sand in declining mental health when he bought an annuity from asalesman who visited his Fort Worth nursing home.

Scott said his relative needed immediate access to his money, not atax shelter or a stream of payments far into the future.

“This problem has literally cost seniors many millions ofdollars,” he said, “and they don’t have the ability torecover.”