Current Pension Topics
Getting Rolled on Rollovers

By JOEL L. FRANK

ALERT, ALERT, ALERT! The following story is about a couple with combined pre-tax retirement investment accounts of $600,000. The wife has a 403(b), while the husband has a 457(b). The wife remained employed after celebrating her 59-1/2 birthday.

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.

This is a very important birthday, not so much for the birthday girl as for the sales-shark that is hunting prey. You see, after reaching the magical age of 59-1/2, you may roll over your 403(b) account to an IRA and have a much wider choice of investment funds. So this woman did exactly that: She rolled over her $300,000 403(b) balance to an IRA and invested all of it in a variable annuity subject to a four-year cash surrender charge or sales commission schedule.

This means if she cashed out the annuity during the first year, a 4-percent, or $12,000, commission would be paid. If the cash-out took place during the second year, a 3-percent, or $9,000, commission would be paid. If the cash-out took place during the third year, a 2-percent, or $6,000, commission would be due, and if the cash-out took place during the fourth year, a 1-percent, or $3,000, commission would have to be paid. Beginning with the fifth year there will be no commissions levied on cash-outs.

Why would anyone agree to pay a commission in order to gain access to their own money? Why would anyone agree to have such an unnecessary cloud over their head? I await your answers. In return for placing this veil of uncertainty over the customer's money, the sales-shark earned an upfront commission of 2 percent of $300,000, or $6,000. The couple did not know this until they spoke informally with me.

The husband's 457(b) account was not rolled over because even though he too is older than 59-1/2, 457(b) account owners may not roll over their balances until they sever employment. At first impression you would think this rule would protect the husband from this shark/rollover specialist. Well, it did not.

The shark talked him into opening up a brokerage account inside of the 457(b) plan. This will give him (and the shark) access to an additional 1,500 (one thousand five hundred) mutual funds. Do you think that is enough choice? Once the brokerage account was opened, the sales-shark signed an investment advisory agreement with the husband to "advise" him on managing his $300,000 457(b) account balance without taking a dime out of the account and without opening up an IRA.

The agreement calls for the husband to pay the shark an annual fee (on the anniversary date of the contract) equal to 1.5 percent of the balance of the account. The first-year fee was $4,500. Oh! "How sweet it is!"

For the first year this couple paid $10,500 in sales commissions and investment advisory fees. In return the "sales-shark/advisor" invested both accounts in seven excellent funds. When I saw the breakdown of their portfolios, they simply mirrored the Target Date funds that both retirement plans offered as part of their Core investment lineup. What a sham! There was no need, whatsoever, for the wife to do a rollover or for the husband to open up a brokerage account.

If you are in such a relationship with your money or are contemplating entering into such a relationship, I invite you to consult with me as soon as possible. Please contact me before you engage the services of someone who earns his/her living by selling fee/commission-based financial products. Their business cards never say "financial sales". The calling cards of such people use key emotional words like: "financial advisor", "financial consultant", "financial planner." Please be aware, legally, they are simply salespersons, and when you sign on the dotted line you will be paying them a fee/commission that is not warranted and is a drain on the growth of your money.