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CWA Retiree's Investment Nightmare: A Cautionary Tale for Members Taking Lump Sum Pensions
Like many CWA members, Gwen Sims had a lump sum pension option, and she chose the cash payout instead of a monthly pension benefit when she retired from Bell South in 2000 at age 50.
Today she says she'd have done it differently had she known what financial disaster was in store as a result of taking bad investment advice.
Gwen's story is a cautionary tale for workers who opt for the cash and take on the responsibility of managing their retirement nest egg.
Fortunately, for her there was a happy ending when she recently won an arbitration judgment against her financial advisor and his firm and received an award of $174,000 for her losses plus attorney fees and expenses.
Gwen, a member of Local 3204 in Atlanta, first went to work for what was then Southern Bell as a telephone operator in 1969. She later became a service representative and was a service consultant when she retired.
Her combined pension lump sum and 401(k) account totaled about $400,000, which she rolled over into an IRA account and went looking for advice about investing the money conservatively. While she planned to keep working part-time as a contractor to Bell South for several years, it was important to Gwen and her husband Bill to preserve the principal and hopefully see it grow in a safe manner for their later years.
'Too Good to Be True'
Gwen and Bill thought they were being prudent when they responded to a direct mail postcard and signed up for a retirement planning seminar to learn more about investing. Then they hired the seminar leader to be their financial advisor.
And did he have a deal for them! The advisor convinced Gwen and Bill that by letting him sell them a variable annuity contract and investing most of their money in aggressive stock mutual funds, they could expect to earn 11 percent each year on the investment.
That would allow them to draw $30,000 in cash each year for 10 years and still see their principal increase, he told them. It seemed a better deal than they could ever have imagined.
"If it sounds too good to be true, it usually is," says Eric Zakarin of UBS Financial Services, who handles investments for CWA's Savings and Retirement Trust and has put on financial planning seminars for many CWA locals.
"One size simply does not fit all," says Zakarin, who stresses that people need to learn about the whole range of investment choices and levels of risk, and choose a mix that fits the individual's unique circumstance.
Zakarin points out that while annuities can be appropriate investments for retirement, there are usually very specific reasons for purchasing them, such as a guaranteed income through purchasing a minimum income benefit rider, or a death benefit.
He notes that, "Many insurance agents and independent financial advisors try to steer people into variable annuities because they can receive much higher commissions - anywhere from 3 to 6 percent or more of your principal amount."
"There is no free lunch," echoes Frank Armstrong, author of the bestselling book, "The Informed Investor." Armstrong, president of Investor Solutions, says that the expectation of an 11-percent annual investment return over several years, such as Gwen's advisor had touted, is "wildly unrealistic."
That's especially true, he says, within variable annuities, which "contain a bewildering assortment of costs layered on top of one another," creating a huge drag on investment performance. "Variable annuities are just that - they're variable. Your investment can go up or it can go down, and loss of capital can be substantial."
For Gwen Sims, far from receiving double-digit gains, her investment within the variable annuity started going south in a hurry.
Hidden Connections, Poor Advice
Getting locked into a high-fee variable annuity together with aggressive investments was a poor choice for Gwen given her goals of protecting against short-term losses and building up funds for later years. Two of the supposed advantages of annuities—tax deferral and a death benefit—didn't apply to her. Her pension money already was tax sheltered in an IRA account, so there was no tax advantage. Her husband was older and unlikely to outlive her, and her children were grown.
Why did her financial advisor recommend the variable annuity? For one thing, he pocketed more than $23,000 in commissions just for selling her the policy—thousands more than he could have made from other investment choices.
And he had other incentives. Gwen's lawyers, Brian Smiley and Steve Gard, uncovered multiple conflicts of interest. Her advisor actually worked for a subsidiary of the company that issued the variable annuity policy. Unbeknownst to the Sims, the retirement seminar they attended was put on by another subsidiary of that company. And the advisor recommended that 40 percent of the money in their annuity sub-accounts be invested in two aggressive stock mutual funds, with high annual fees, that were owned by yet another subsidiary of the same company.
In the end, an arbitration panel agreed that the financial advisor and his company had breached their duties in Gwen's case and ordered them to make restitution for her losses.
"I want other people to know there is hope, that they can fight back" if they are grossly misadvised, Gwen says of her experience.
Today she says she'd have done it differently had she known what financial disaster was in store as a result of taking bad investment advice.
Gwen's story is a cautionary tale for workers who opt for the cash and take on the responsibility of managing their retirement nest egg.
Fortunately, for her there was a happy ending when she recently won an arbitration judgment against her financial advisor and his firm and received an award of $174,000 for her losses plus attorney fees and expenses.
Gwen, a member of Local 3204 in Atlanta, first went to work for what was then Southern Bell as a telephone operator in 1969. She later became a service representative and was a service consultant when she retired.
Her combined pension lump sum and 401(k) account totaled about $400,000, which she rolled over into an IRA account and went looking for advice about investing the money conservatively. While she planned to keep working part-time as a contractor to Bell South for several years, it was important to Gwen and her husband Bill to preserve the principal and hopefully see it grow in a safe manner for their later years.
'Too Good to Be True'
Gwen and Bill thought they were being prudent when they responded to a direct mail postcard and signed up for a retirement planning seminar to learn more about investing. Then they hired the seminar leader to be their financial advisor.
And did he have a deal for them! The advisor convinced Gwen and Bill that by letting him sell them a variable annuity contract and investing most of their money in aggressive stock mutual funds, they could expect to earn 11 percent each year on the investment.
That would allow them to draw $30,000 in cash each year for 10 years and still see their principal increase, he told them. It seemed a better deal than they could ever have imagined.
"If it sounds too good to be true, it usually is," says Eric Zakarin of UBS Financial Services, who handles investments for CWA's Savings and Retirement Trust and has put on financial planning seminars for many CWA locals.
"One size simply does not fit all," says Zakarin, who stresses that people need to learn about the whole range of investment choices and levels of risk, and choose a mix that fits the individual's unique circumstance.
Zakarin points out that while annuities can be appropriate investments for retirement, there are usually very specific reasons for purchasing them, such as a guaranteed income through purchasing a minimum income benefit rider, or a death benefit.
He notes that, "Many insurance agents and independent financial advisors try to steer people into variable annuities because they can receive much higher commissions - anywhere from 3 to 6 percent or more of your principal amount."
"There is no free lunch," echoes Frank Armstrong, author of the bestselling book, "The Informed Investor." Armstrong, president of Investor Solutions, says that the expectation of an 11-percent annual investment return over several years, such as Gwen's advisor had touted, is "wildly unrealistic."
That's especially true, he says, within variable annuities, which "contain a bewildering assortment of costs layered on top of one another," creating a huge drag on investment performance. "Variable annuities are just that - they're variable. Your investment can go up or it can go down, and loss of capital can be substantial."
For Gwen Sims, far from receiving double-digit gains, her investment within the variable annuity started going south in a hurry.
Hidden Connections, Poor Advice
Getting locked into a high-fee variable annuity together with aggressive investments was a poor choice for Gwen given her goals of protecting against short-term losses and building up funds for later years. Two of the supposed advantages of annuities—tax deferral and a death benefit—didn't apply to her. Her pension money already was tax sheltered in an IRA account, so there was no tax advantage. Her husband was older and unlikely to outlive her, and her children were grown.
Why did her financial advisor recommend the variable annuity? For one thing, he pocketed more than $23,000 in commissions just for selling her the policy—thousands more than he could have made from other investment choices.
And he had other incentives. Gwen's lawyers, Brian Smiley and Steve Gard, uncovered multiple conflicts of interest. Her advisor actually worked for a subsidiary of the company that issued the variable annuity policy. Unbeknownst to the Sims, the retirement seminar they attended was put on by another subsidiary of that company. And the advisor recommended that 40 percent of the money in their annuity sub-accounts be invested in two aggressive stock mutual funds, with high annual fees, that were owned by yet another subsidiary of the same company.
In the end, an arbitration panel agreed that the financial advisor and his company had breached their duties in Gwen's case and ordered them to make restitution for her losses.
"I want other people to know there is hope, that they can fight back" if they are grossly misadvised, Gwen says of her experience.