Monday, June 22, 2015

No. 104R: Guardian Life Rectifies an Unsuitable Rollover (revised)

[Note: In this revision, Scott Witt is correctly identified as a fee-only insurance advisor. In the original version, I identified him as a fee-only financial advisor. I regret the error.]

In August 2013, Beatrice (not her real name), a 78-year-old resident of New York State, rolled over her retirement accumulation at College Retirement Equities Fund (CREF) into an individual retirement account (IRA) containing a variable annuity issued by Guardian Insurance & Annuity Company, a subsidiary of Guardian Life Insurance Company of America. The rollover was unsuitable. Guardian eventually rectified the situation to Beatrice's satisfaction.

Edgar Montenegro
Edgar Montenegro (CRD# 4768006) is a registered representative of Park Avenue Securities, a Guardian subsidiary. He sold Beatrice on the idea of using her CREF accumulation to buy the Guardian annuity.

Scott Witt
Scott Witt is a Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries, a fee-only insurance advisor, and a Financial Services Affiliate of the National Association of Personal Financial Advisors. His website is at

Several months after the rollover, Beatrice sought Witt's advice. In March 2015, Witt posted an article about the case on his website. The article, written before the case was resolved, was entitled "An Embarrassing Variable Annuity Sale—and Refusal to Make Amends." Witt did not identify Beatrice, Montenegro, or the companies.

The CREF Accumulation
CREF and its affiliate, Teachers Insurance and Annuity Association of America (TIAA), cater mainly to members of the academic community. Beatrice's retirement accumulation with CREF was $325,000. According to Witt, CREF's annual expense charges were 41 basis points. Because a basis point is one hundredth of a percentage point, the expense charges were less than one half of 1 percent.

Problems with the Rollover
In his article, Witt cited five problems with the rollover. First, a benefit of a variable annuity is that investment earnings are deferred for income tax purposes. However, Beatrice already had that benefit with her CREF accumulation. Witt considers it unnecessary and inappropriate to place a tax deferral vehicle inside an IRA, which is a tax deferral vehicle.

Second, according to Witt, the Guardian annuity imposed 110 basis points of annual mortality and expense charges, 75 basis points of annual investment expense charges, and 20 basis points of annual administrative expense charges. The sum of 205 basis points far exceeded the 41 basis points for the CREF accumulation.

Third, the Guardian annuity included a death benefit at an annual cost of 50 basis points. According to Witt, Beatrice did not need the death benefit.

Fourth, the Guardian annuity included a rider guaranteeing that the eventual lifetime income from the annuity would be enhanced significantly if Beatrice avoided making withdrawals for ten years. The annual cost of the enhanced lifetime income guarantee was 115 basis points.

Fifth, Witt cited "a mistake in the purchase paperwork." Beatrice applied to have $200,000 of her $325,000 CREF accumulation rolled into the Guardian annuity. However, when the annuity was issued, the entire $325,000 was rolled into the annuity. Witt said "it's unclear which financial institution was responsible but it clearly was not Beatrice's mistake." Witt told me CREF informed Beatrice that there were some unauthorized telephone calls regarding her account around the time of the rollover. The "mistake" caused Beatrice to forfeit the enhanced lifetime income guarantee because she had to take required minimum distributions from the Guardian annuity to avoid draconian income tax penalties.

Complaint and Rejection
On July 26, 2014, Beatrice, aided by Witt, registered a complaint with Guardian. She explained why the rollover was unsuitable and asked for a full refund without the surrender charge of about $31,000.

On September 10, 2014, Judy Cummins, a complaint analyst at Park Avenue Securities, rejected the complaint in a four-page letter. She mentioned such things as the information in the prospectus, Beatrice's statement that she had read the prospectus, her agreement to the contract terms, her failure to ask for a full refund during the ten-day free look, and her statement that she would not need access to the funds. According to Cummins, Montenegro said he spoke with Beatrice after the $325,000 rollover (instead of the originally requested $200,000 rollover) and Beatrice agreed to it. Cummins said Park Avenue Securities "found no evidence of impropriety on the part of your Representative" and "We therefore respectfully reject your request for remuneration."

My Letter to Guardian
I knew about Beatrice before Witt posted his article, because he had told me about the case. I felt that Guardian would not have rejected the complaint if the company had conducted a thorough investigation.

On April 24, 2015, I sent a two-page letter by regular mail to Deanna Mulligan, president and chief executive officer of Guardian. I said I was going to post an article about the case on my blog. I said I would not identify Beatrice, but would indicate her age and say she is a resident of New York State. I asked Guardian for a statement, suitable for inclusion in the article, explaining how Guardian will restore Beatrice to her original financial position, or, alternatively, why Guardian will not restore her to her original financial position. I sent copies of the letter to Beatrice, Montenegro, Cummins, Witt, and Roger Ferguson, chief executive officer of TIAA-CREF. I requested the statement by May 11.

Guardian's Response
Jeanette Volpi is head of external communications at Guardian. On May 8, I received this statement from her by e-mail:
Guardian is legally constrained by federal privacy laws, as well as the Company's privacy policy, from providing client information publicly, but can confirm we are working directly with the client identified to address her concerns.
Guardian conducted an investigation and resolved the matter to Beatrice's satisfaction. The settlement terms are confidential.

General Observations
It is unfortunate that the rollover ever took place, and that Guardian initially rejected Beatrice's complaint. However, the company is to be commended for eventually doing the right thing.