Considering a Roth Conversion? Avoid the Crooks
When we hear about 401(k) investors moving all or a portion of their account to an IRA, the question becomes, "What did they invest you in?" Now, with the new tax law that enables investors to more easily convert their traditional IRA assets to a Roth IRA, brokers, insurance agents, and other financial product salespeople are drooling. Why? They have another pool of money, and a large one, to roll into their annuities and other such products that pay out very large commissions, yet may not be in the best interests of the investor. This point is well illustrated in the following article by Kathy Kristof of MoneyWatch.com:
Kathy Kristof
A change in tax laws has crooks, con artists and insurance agents gleefully plotting out strategies to nab your retirement dollars by luring you into discussions about “Roth conversions.”
I got a glimpse of one such dangerous trap when I was, once again, invited into an “insurance agents only” webinar this month that was promoted with the line: “Learn how you can turn Roth IRA conversions into annuity gold!”
Experts in finance will tell you that one of the dumbest things you can do is buy an annuity with your retirement money because annuities are almost always loaded with high fees that will rob you of hundreds of thousands of dollars in wealth. I’ll get to the specifics later, but someone with $100,000 to invest for 20 years is likely to end up $250,000 poorer by choosing an annuity over a simple index fund in their IRA. But selling annuities on retirement money is a great deal for an insurance agent because he or she earns a commission that often amounts to 5% to 7% of your assets. Where do you have most of your assets? Most likely in your retirement account.
In a conference call on January 7th, a California insurance salesman named Doug Warren, who has dubbed himself “Mr. Roth IRA,” told his audience of insurance agents (and me) that offering informational seminars on Roth conversions was a gold mine.
“The reason to get involved in this [Roth conversion] market is because it’s a tremendous prospecting opportunity,” said Warren.
By discussing Roth conversions, which are all over the news, Warren says you can lead people into your office, break down their resistance to a sales pitch by providing unbiased information about the costs and benefits of a Roth conversion and then go in for the kill with your product pitch.
“I don’t care whether the client converts or he doesn’t,” he said in the webinar. “The important thing is that you pivot to your product sale.”
To understand how he’s going to do this so smoothly that even a smart investor might be tempted to buy into his pitch, a little background is necessary.
How does this affect 401(k) investors? Some 401(k) plans allow for what is called an in-service withdrawal. Depending on how they plan was designed, in-service withdrawals allow the investor to roll out a specific amount (usually a percentage) into an IRA, usually after they reach a specific age. We have seen first hand how this is marketed by product sales people, who start salivating over that big nest egg that can now be tapped for their interests. Therefore, some are promoting the tax and investment benefits of a Roth conversion in an effort to earn greater commissions, as the article above states.
Consider This Before You Decide:
- Be Careful - If a situation sounds too good to be true, it probably is.
- Guarantees - If at any point the word "guarantee" or "minimum return" comes up, consider it a serious red flag.
- Fees and Commissions - If a financial advisor is unwilling to demonstrate on a formal document how much they will be compensated, then simply walk away.
- Your Interests or Theirs? - Ask this simple question: "Will you sign a document demonstrating you will act as a fiduciary, putting my interests first?" If not, this probably is not going to turn out to be a good relationship for you.
- Talk to Your Accountant - A Roth conversion has serious tax consequences, so make sure someone that understands what that could mean to you helps you through the decision.
Read Article on MoneyWatch: Crooks Are After Your Retirement Plan
NOTE: BeManaged does not provide wealth management or IRA services of any kind.
This article by Ms. Kristof is full of wrong points. First of all, how can she be so sure that the money put “in a simple index fund” will out-perform an annuity? Does she realize the reality that the market doesn’t always return 8% over time, and – even if it does – Mr. Investor may have to suffer through a 40-50% drop in the value of his investments right before he retires. Then what happens?
In the real world, professional advisors like myself come across this scenario every week. If someone loses 50% in the market – as did hundreds of thousands of people during the last economic downturn – they will need to see a 100% gain JUST TO GET BACK TO EVEN.
This is why a FIA (Fixed-Indexed Annuity), properly and honestly explained, can be a far-better investment vehicle for Mr. Investor than just leaving his money to the whims of the market. I’ve seen these FIA vehicles work for my clients in the real world. I’ve never lost a dime of my clients money, and they understand the long-term structure of these contracts as well – because I explain it to them long before I ever ask for their signature. Also, many advisors don’t make 5-7% per annuity sale – sometimes it’s only a point or a point-and-a-half. But, even at an 8% commission, it is a comparable compensation to a money manager’s fees over a 10-20-year period.
Articles trashing annuities, like the one written by Ms. Kristof, are dangerous, and do nothing in actuality but to scare many people away from sound, conservative investments. Or, at the very least, she should differentiate between a variable and a fixed annuity. Very poor article.
Jason Crooks
Brentwood, TN