When Free Dinner Becomes Lasting Heartburn

By LouAnn Schulfer, AWMA®, AIF® Accredited Wealth Management AdvisorSM, Accredited Investment Fiduciary® , Published Author |

A few weeks ago I had the pleasure of meeting with a new couple for a consultation.  After years of hard work and disciplined saving, they’ve turned the page to the next chapter of the American dream:  retirement.  When asked “What is the most important thing we can help you with”?  they responded that they’d like help with their retirement accounts.


I reviewed copies of their most recent investment statements.  Some were very typical:  a couple of 401(k)s that are still in the employer’s plan, a brokerage IRA holding A-share mutual funds and a smaller advisory account with a somewhat local firm.   There was one account though, that really stood out.  It was like that proverbial sore thumb not only because it was by far the largest account they had, but because of the significant restrictions on the account, the most I may have ever seen.


The account statement said this was a “12 Year Fixed Indexed Annuity”.  Through an Annuity Intelligence Report Tool that we have, we researched the details.  To further our investigation, I reached out to the annuity company to confirm that what we’d found is in fact, true.  As we’d suspected from the title, this particular annuity has a 12-year “surrender” penalty, with a 7% free withdrawal provision.  Translated, that means that if the client wants money out of this annuity, they can only withdraw up to 7% of the balance per year for the first 12 years.  If they exceed that 7%, there are significant penalties.  While surrender periods and withdrawal penalties are common in annuities, what was painful in this case was the long length of time they are committed, the relatively small amount of their own money they’d be permitted to use each year during retirement (especially if an emergency arose), and the fact that about one half of their total money is in this restrictive contract.  More commonly, we see surrender periods of 5 – 7 years with a 10% free withdrawal provision, and a lower percentage of a client’s overall money in one annuity.  Another restriction we found on the account is that the strategy can only be changed every three years, and there are only three strategies to choose from.  That means that of the three choices of how the money is invested, the “strategy option” in this case, had a “strategy term” of three years.  Generally, we see a far greater selection of investment type options available in annuity contracts with more flexibility.


I enjoyed meeting with and getting to know the couple.  We had long conversations about their investment experiences throughout the years.  I asked them how they were introduced to the advisor (in this case, I use the term loosely!) that put their money into this contract.  They relayed what I’d suspected:  the classic free dinner seminar.  I couldn’t help but think how we all know “there is no such thing as a free lunch”, but how tempting it is when the juicy steak dinner invitations show up, even from someone you’ve never met.  Be careful, because that free dinner can turn into a lasting heartburn.


LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com.  SchulferAndAssociates.com , louannschulfer.com or louann.biz 


Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.