Price for expert retirement advice is best paid carefully
By H.J. Cummins, Staff Writer
Mpls Star Tribune

Tuesday, September 27, 2005

Dick Washburn tracks his "Fixed Costs" on a worn paper grid he keeps in a kitchen drawer.

The penciled obligations include water, sewer, gas, veterinary expenses for Misty the dog and Scamp the cat, and $20 a month for his collection of new state quarters.

"The old-fashioned word for this was 'budget,' " said the retired school librarian, 71, who now splits a duplex with his daughter and granddaughter in St. Paul.

Washburn's new-fashioned words for his entire financial system in retirement are "three buckets":  One, cash on hand for three years;   Two, conservative investments he can cash out over the following four years;  and Three, more aggressive investments he'll tap into after that.

It's a system Washburn's financial adviser helped him draw up.  For that service, and his own peace of mind, he pays her a retainer and management fee.

As 77 million baby boomers head into the new world of do-it-yourself retirement, many without the golden parachute of a pension, a lot of enterprises want to help.  At a cost, of course.

This week, American Express will spin off a new Fortune 500 company, Ameriprise Financial, dedicated to personally advising people on how to manage their money.

In the past five years, 12,000 people have become certified financial planners;  there now are more than 48,000.  New and old businesses are selling investments, insurance policies, estate planning, and retirement advice books -- all promising to help navigate old age.

It's a logical -- and mostly useful -- market response to the financial needs that certainly will explode over the next 20 years, as boomers cash out a big chunk of Americans' $6 trillion in retirement savings.

But all those new services will at best confuse retirees and at worst, cheat them.  There are no precedents to guide this generation.  They're "scared pioneers," said Elmer Rich III, a market researcher in Chicago.  "They sit at the ... edge of momentous change."

What they face

Without the comfort of lifelong pensions and rock-solid Social Security, this generation cannot ease up on its financial self-sufficiency.  And because they can expect to spend a quarter of their lives in retirement, they have a lot of time to cover.

Washburn understands that future better than most.

An amateur historian, he knows how much things have changed over the generations, including today's longevity.

He pointed to a photo of his great-grandparents and their nine children to make his point.

"Half of them died before they were 35," Washburn said.

He, on the other hand, plans to live many more years.  A model saver while he was young, he is now a model steward of his assets.

But for much of that he relies on a financial planner.

Ginger Ewing, an adviser at Ameriprise Financial in Inver Grove Heights, introduced him to the three buckets concept.  Beyond that, she advises Washburn on nearly all his financial matters -- IRA payouts, long-term care insurance, investment diversification, and tax strategies for his myriad sources of income.

"I couldn't do this without her," Washburn said.

Many retirees have big problems with financial advisers, however, said Rich, in Chicago.

They hire advisers because they know they're not equipped to handle their own retirement, he said.  But they do it badly, because they're so cynical about the arrangement.

"They see the system as basically corrupt, rigged for the benefit of the brokers," he said.

He found that their solution commonly is to hedge, spreading their money among several investment advisers and brokers.

"Their idea is that nobody has enough of their money to hurt them too badly," Rich said.  But that only means they make several bad choices instead of just one, he said.

"They don't pick their advisers in any logical sort of way," he said.  "They ask friends and relatives who have no sophistication about investments.  They choose their advisers like they do a dentist or a plumber."

The system doesn't help them.  There is no official resource list or regulation of financial advisers.  Anyone can hang a shingle and start cold-calling for customers.

Deferred annuities

Some senior advocates are bracing for inevitable problems.

"Any time there's desperation, there's going to be people out there looking to turn that into an opportunity," said Dennis Gerhardstein, programs director for the Minnesota Senior Federation in St. Paul.

One dispute gathering steam involves "deferred annuities," with lawsuits from Hawaii to Pennsylvania.

Annuities are contracts with insurance companies in which people pay a big sum of money up front in exchange for a lifetime of monthly income checks.  It's basically people setting up a pension with their own money, and financial experts almost universally recommend them.

The problem with deferred annuities is they sometimes don't start making monthly payments for 10 or 20 years.

Bill Anderson of Robbinsdale, for example, was sold a $50,000 annuity in March that wasn't scheduled to start payments until 2017.

Anderson is 79 now and clearly "in poor health and confused," according to a note his attorney, Rolf Nelson wrote the insurance company just in time to meet the 20-day cancellation window.  Anderson's son, David, had found the paperwork and brought it to Nelson, an elder-law specialist in Brooklyn Center.

If he had waited one more day, his father would have been out a $4,000 sales commission and a $3,500 early surrender fee.  That's what happens to many others who don't catch the problem in time.

"My dad didn't realize that the money was locked up, that he couldn't get to it if he needed it for medical care," David Anderson said.

"We see this all the time," Nelson said.  "Even one of the banks sold one of our clients who was 80-something an investment vehicle the guy had to be 105 before he could collect."

"This has just mushroomed into a big moneymaker for many of these companies," said Bill Shernoff, a Claremont, Calif., attorney who has filed at least three lawsuits alleging bad-faith representation and elder abuse involving deferred annuity sales.

In one of those, against Des Moines-based AmerUs Group Co. and its affiliates, Shernoff is asking a judge to declare a national class action.

AmerUs Group declined to comment on the pending litigation, except to say that "we feel we have valid defenses to these allegations," said Marty Ketelaar, vice president of investor relations.

The investment industry has asked the Securities and Exchange Commission to require a special screening before sales of a particularly high-risk annuity called a "deferred variable annuity," said Steve Weisbart, an economist at the Insurance Information Institute in New York.

The National Association of Securities Dealers (NASD) wants all sales agents to complete a 12-point checklist -- including the customer's age -- before those sales, Weisbart said.

"The NASD wants the [agents'] paperwork on this stuff," he said, "because it's concerned that there still seem to be cases where inappropriate sales take place."

In Minnesota, insurance regulators opened 41 investigations of annuity complaints in the first half of this year, up from 69 in all of 2003, state records show.

Also, Minnesotans recovered almost $165,000 so far this year, as a result of complaints, up from $53,000 in 2003.

A hit-and-miss lineup

In their rush to serve aging boomers, some businesses are taking shortcuts, said Rich, the Chicago market researcher.

"What you're finding now are a lot of things with 'retirement' stamped on them, but they're just old, repackaged products that don't really address the needs of retirees," he said.

But the marketplace is also generating some potentially significant new products and services, too, said Jon Dauphiné, director of economic security strategies at AARP in Washington, D.C.  He and others gave these examples:

•  Registered financial gerontologists.  It's a specialized training for financial advisers.  The designation is granted by the American Institute of Financial Gerontology and the American Society on Aging.

•  Draw-down services.  Financial services or investment companies will advise people how much they can take out of their retirement accounts so they don't outlive their money.

•  Reverse home mortgages.  They allow older homeowners to cash out some of the equity in their house without having to sell it.  These are not new, but Dauphiné expects the market for them to take off, after the recent run-up in home prices makes retirees' homes one of their biggest assets.

•  Fidelity Retirement Income Advantage Program.  New last year, it reaches people who are about to retire and need to figure out how to convert their 401(k)s and other savings into retirement income.  An initial retirement income planner is free to anyone.  Fidelity also sells an income management account, to help retirees organize their multiple streams of income, for an annual fee of $50.  Those customers not required to buy any Fidelity products, "but we certainly hope people will move money to Fidelity," a company spokesperson said.

•  Income Solutions.  New from Hueler Companies in Eden Prairie, it enables workers approaching retirement to buy an annuity directly through their employers' 401(k) plans at "institutional," or group, rates.  A company makes Income Solutions a 401(k) benefit.  As employees near retirement, they can ask eight screened insurance companies on a list to give them a price quote.  The companies can quote only one kind of basic annuity.  The workers then can roll part or all of their 401(k) accounts into the annuity of their choice.

"We don't offer variable annuities or deferred annuities," said Kelli Hueler, owner of Income Solutions.  "All those bells and whistles are a world of confusion.  If you slice it all the way down to just one type -- immediate, basic income replacement -- you get rid of all that."

Late last year, Hewitt Associates became the first plan provider to offer Income Solutions at 50 companies where Hewitt runs 401(k) plans, including IBM, Hueler said.

All the new services needed, and the money to be had, "have to do with getting in gear for the massive workforce exit of the boomers," said Dauphiné at AARP.

"The point is to capture people when they're able to take all that money out of their 401(k) plans," he said.

There's even a new word for that:  After years of asset accumulation, retirees now will start living off those savings.

"They are moving into 'de-cumulation,' " he said.

H.J. Cummins is at hcummins@startribune.com.

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