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Moving Your Money From TSP…Beware of False Advertisements

Beware of False Advertisements...like these:


The “Guaranteed” Advertisement: “Insured your retirement paycheck. Withdraw a part or all of your TSP and buy Annuities to guaranteed income streams for your lifetime and in some cases…your beneficiary’s’ lifetime.”


The "Lowest Taxes" Advertisement: “When is a one-million-dollar TSP account…really $600,000? Buy annuities to guarantee that your investments will not be taxed all at once when you retire. We will guarantee your income at the lowest tax rate.”


The "GOLD” Advertisement:  “Buy a ‘GOLD IRA’ or precious metals IRA Individual Retirement Account (IRA) that includes physical gold, or other IRS approved precious metals as silver. Buy Gold and silver as shields to protect your TSP investments from inflation. Create a hedge against economic downturn”


Misleading Advertisements and Dishonest Advisors Leverage This Misunderstanding
Federal Employees Retirement System (FERS), Civil Service Retirement System (CSRS) and Uniform Services (United States Armed Services) employees participating in the Tax Savings Plan (TSP) need to be aware that the above-mentioned schemes are not FDIC or for that fact SIPIC coverage…not even close. Using the word “INSURANCE’ and ‘PROTECTION’ is the hook. Consumers tend to think of FDIC and SIPIC when they hear those words. Dishonest or misleading ads and advisors leverage this misunderstanding.

Note: CSRS is still available to federal workers who were in the CSRS system before 1987 and who chose to remain with CSRS in lieu of switching to FERS at that time.


Federal Deposit Insurance Corporation -FDIC
Each depositor is insured to at least $250,000 per insured bank. FDIC deposit insurance covers the depositors of a failed FDIC-insured depository institution dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default, up to at least $250,000. For example, if a person had a CD account in her name alone with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured, since principal plus interest did not exceed the $250,000 insurance limit for single ownership accounts.


Securities Investor Protection Act - SIPC
SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. It is important to recognize that SIPC protection is not the same as protection at a Federal Deposit Insurance Corporation (FDIC) insured bank. SIPC does not protect the value of any security. Investments in the stock market are subject to fluctuations in market value. SIPC was not created to protect these risks. That is why SIPC does not bail out investors when the value of their stocks, bonds, and other investment falls for any reason. Instead, in the event of a liquidation, SIPC replaces the missing stocks and other securities when it is possible to do so. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.


Guaranteed Income Payments…for Life
Annuities are being marketed to guaranteed income streams. Annuities can provide income for life…but there is still risk. Depending on fixed or variable annuity payment…the investor could be exposed to Liquidity risk, Credit risk, Reinvestment risk and Inflation risk. Also, the company issuing the annuities could go bankrupt over your lifetime, so Horizon and Longevity risk exist.

Guarantees...only as good as the company that issues them

Here’s a thought. Lifetime Income guarantees are only as good as the company that issues them. TSP received its first participant contributions in April 1987. This fund and its professional managed funds and investments had been around more than 30 years. Five million participants and nearly $500 billion in assets. The TSP is now recognized as the largest defined contribution retirement plan in the world.


Note: TSP itself does not issue or create annuities, your annuity will be purchased from the TSP annuity provider. The annuity provider is chosen competitively from long established reputable insurance companies under stringent due diligence by the Federal Retirement Thrift Investment Board, the agency that administers the TSP.


Massive Tax Bites from Large Withdrawals
One of the ads above asked the question, “When a one-million-dollar TSP account is really $600,000?” This purports the idea that 40% of the retirement assets will be eaten by federal and state taxes. So, they suggest you buy annuities to guarantee that your investments will not be taxed all at once when you retire. They also suggest that your income will be taxed at the lowest possible tax rate.


Annuity income is taxed as ordinary income. It is very rare that a retiree would withdraw 1 million dollars all at once from a retirement plan. The goal is steady dependable retirement paycheck…and if possible, a paycheck that keeps up with inflation. Also, the annuitant other sources of income will affect tax rates. Also, keep in mind that Financial Firms nor Insurance Companies can guarantee low tax rates for individuals.


You Don’t have To Transfer Your TSP for Annuity Options
If you are an American worker and have the proper credits…you are already entitled to an annuity. Your Social Security retirement check mimics an annuity…with a nice plus. Your Social Security check gives you an inflation-protected income for life. I must be fair and say that some insurers will add a so called ‘Inflation Rider’ usually at considerable additional cost.


In most cases…Social Security is not enough to maintain a comfortable retirement lifestyle. Some retiring servicemembers and veterans may consider taking a part or all their other retirement assets and buy an annuity from an insurance company to plug retirement income gaps.


Now here is the question. Why would you move your money from the proven professional management, diversification and low administrative cost of TSP to buy guaranteed income payments from an insurance company when you can use the annuity options within TSP?


I want you to hear this loud and clear. You do not have to cash out of the TSP to buy a lifetime annuity. The TSP, through its annuity provider, offers the following annuity options:


Single life annuity: Monthly payments for your lifetime


Joint life annuity: Joint Income with your spouse or with someone other than your spouse. Typically you have a choice of:

 

100% survivor annuity. The amount of the monthly annuity payment to the survivor is the same as the annuity payment made while both you and your joint annuitant are alive. However, the amount of the monthly payment that you receive while you are both alive is generally less than it would be if you had selected the 50 percent survivor annuity.


50 % survivor annuity. The amount of the monthly annuity payment to the survivor- whether the survivor is you or your joint annuitant - is cut in half (that is, cut to 50 percent) of the annuity payment made while both you and your joint annuitant are alive. Once you have chosen either a single life or a joint life annuity, you must decide whether you want to receive level or increasing payments. Currently, these TSP options and features are available to take care of your needs.


Level Payments
If you choose level payments, the amount of the monthly annuity payment remains the same from year to year.


Increasing Payments
If you choose increasing payments, the amount of the monthly annuity payment can change each year on the anniversary date of the first payment. The amount of the change is based on the change in inflation, as measured by the consumer price index (CPI).


Providing for Beneficiaries
Two additional features are available to you if you want to provide payments to the beneficiary, or beneficiaries, you name in the annuity section of your TSP withdrawal form. Keep in mind that when you choose additional features, your monthly annuity payments will be less than they would have been had you not chosen any.


Cash Refund
If you (and your joint annuitant, if applicable) die before the amount of your TSP balance used to purchase your annuity has been paid out, the remaining amount will be paid to your beneficiary, or beneficiaries, in a lump sum.


Ten-Year Certain
If you die before receiving annuity payments for a 10-year period, your monthly annuity payments will continue to your named beneficiary, or beneficiaries, until the 10-year period is met. If you live beyond the 10-year period, you will continue to receive payments, but no annuity payments will be made to your beneficiaries when you die.


Annuity Options…all generate ‘Ordinary (Taxable) Income
Again…either way, all income payments will be fully taxable at ordinary income tax rates. At some point, the IRS must collect revenue sooner than later. In these cases, later.


Move Assets from TSP to GOLD or Silver IRA
Precious Metals such as gold and silver may be an ideal hedge for some financial market risks. Yet other risk exists. There is always the possibility of theft when you have precious metals. Also, precious metals might not be immediately liquid. In some cases, an IRS approved custodian holds in custody the physical bullion coins or bars of the Gold IRA for the benefit of the account owner. High secured storage fees may be passed on to you. Precious metal dealers charge premium prices. Precious metal also has large liquidation spreads. Again, these costs are passed on to you…the investor. In most cases you are ‘Paper Metal’ investing in an exchange traded fund (EFT) or Precious Metal mutual fund. You don’t own the gold or silver itself…instead you own a proportionate interest based on your investment and shares owned.


You Have Broad Range of Investment Options Now
Within the TSP, you have a broad range of professionally managed investment options, including government securities, bonds, and domestic and foreign stocks. This combined with the fact that TSP has among the lowest fees of any investment platform in the world causes us to ask one question, “Why are you moving your Retirement Assets?”


Fiduciary Standard of Care – Investments
Advisors, Agents and Planners serving Federal Employees Retirement System (FERS), Civil Service Retirement System (CSRS) and Uniform Services (United States Armed Services) employees participating are acting in a fiduciary capacity. They are held to a high standard of honesty and full disclosure regarding the client and they must not obtain a personal benefit at the expense of the client.


When FERS, CSRS, and Uniform Services employees see the above-mentioned ads on various media or see ‘so-called’ Financial Experts on morning talk shows promoting these schemes…the real question arises, “Is this ‘Revenue Driven’ advice.’” ‘


Revenue Driven Advice
Annuity commissions rises with the surrender charge period. For example, an indexed annuity with a 10-year surrender charge period pays a higher commission than an indexed annuity with a 5-year surrender charge. Higher fees result in lower net investment returns for you. This could impact the amount of your monthly retirement paycheck. The Agent, Advisor or Planner benefit…not the customer. Hence ‘Revenue Driven’ advice.’”


The Department of Labor’s definition of a fiduciary demand that Retirement and Investment Advisors act in the best interests of their clients and put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest and states that all fees and commissions for retirement plans and retirement planning advice must be clearly disclosed in dollar form to clients. The definition has been expanded to include any professional making a recommendation or solicitation in this area… not simply giving ongoing advice.


Sample of ‘Clear Disclosure’ in a Advertisement
Just like other retirement accounts, such as a 401(k) or IRA, there are also expenses associated with annuities. Fees for variable annuities can easily total 3% a year or more. The industry average for five typical fees include:

  • mortality and expense fees (M&E): 1.35%

  • administrative fees: 0.10% - 0.30%

  • investment management fees charged for the underlying funds inside the annuity: 1.00%

  • fees for optional riders or insurance guarantees: 1.00%

  • surrender fees which may be charged for withdrawing funds from an annuity too soon: as much as 8.00%.

There may also be commissions that an insurance company pays to the broker or agent who sells the annuity, typically ranging from 5% to 9% of the amount you invest. This may lead directly to the size of the surrender fee, as well as impacting the overall cost.


Fiduciary Standard of Care
The Fiduciary Standard of Care requires that a financial adviser act solely in the client’s best interest when offering personalized financial advice. Under federal law, the Investment Advisers Act of 1940, investment advisers are regulated by the Securities and Exchange Commission (SEC) or appropriate state authorities and are required to provide services to their customers under the fiduciary standard. Currently, Broker-Dealers are also regulated under federal law, including under the Securities Exchange Act of 1934 under a less stringent fiduciary standard.
The NAIC revisions to the Fixed Annuity Suitability Rules are anticipated to be completed in 2019. The Working Group's draft amendments to Model #275 include a requirement for producers and insurers, where no producer is involved, act in the interests of the consumer at the time the recommendation is made, without placing the producer's or the insurer's financial interest ahead of the consumer's interests.


File a Complaint
Most business in the securities industry is conducted fairly, efficiently and in a manner that satisfies everyone involved. But problems can arise. If you believe that a salesperson, brokerage firm or other industry professional has treated you unfairly or committed a ‘Revenue Driven Transaction,’ contact the financial firm to see if you can resolve the issue. We suggest you go to their website and file the complaint. This way…you have written record. If not, make a phone call. Keep copious notes. If you are still not satisfied with the firm's response, you can file a complaint with the Financial Industry Regulatory Authority (FINRA).


Through its Complaint Program, FINRA investigates complaints against brokerage firms and their employees. FINRA is empowered to take disciplinary actions against brokers and their firms. Sanctions may include fines, suspensions, barring from the securities industry or other appropriate sanctions.
http://www.finra.org/investors/investor-complaint-center


File a Consumer Complaint – Fixed and Variable Annuities
Financial firms and Investment companies can sell annuities. Insurance companies create and issue annuities. If you have ever won a large state lottery and took the annuity option, you know this.  If there are complaints involving annuities…this is the realm of the State Insurance Commissioner:

  • Go here: State Consumer Complaint Departments Click on your state to be taken to the state's online filing site. Follow the state's process for filing your complaint.

  • Go here for PHONE numbers of State Consumer Complaint Departments


Sometimes Things Go Bump In The Night
Most Investment and Insurance companies are reputable and work hard to earn their customers business. We have simple given you options just in case…things go bump in the night. We help you to bump back.

References

  1. Get questions answered. Get user friendly strategies to help you manage your TSP and retirement accounts for income. Go to Back2Civilian.com Click or hover on ‘Retirement’ tab for menu of TSP strategies and information. 

  2. Investopedia - Laws & Regulations -The DOL Fiduciary Rule Explained | https://www.investopedia.com/updates/dol-fiduciary-rule/

  3. Federal Deposit Insurance Corporation -FDIC | https://www.fdic.gov/deposit/deposits/faq.html

  4. Securities Investors Protection Corp - SIPC https://www.sipc.org/about-sipc/sipc-mission

  5. NAIC Fixed Annuity Suitability:https://www.naic.org/cipr_topics/topic_dep_of_labor_fiduciary_rule.htm

  6. TSP Annuity Option: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/annuities/options.html

  7. Questions You Should Ask Before Buying an Annuity Policy | MarketWatch | https://www.marketwatch.com | https://www.marketwatch.com/story/5-questions-you-should-ask-before-buying-an-annuity-policy-2018-10-03

  8. The Financial Crimes Enforcement Network (FinCEN) |FinCEN.gov

  9. Bank Secrecy Act (BSA) https://www.irs.gov/businesses/small-businesses-self-employed/bank-secrecy-act

  10. The TSP: 30 Years at a Glance | The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees and members of the uniformed services. https://www.tsp.gov/thirty/

  11. The Federal Retirement Thrift Investment Board administers the Thrift Savings Plan (TSP), a tax-deferred defined contribution plan similar to private sector 401(k) plans which provides Federal employees the opportunity to save for additional retirement security. | https://www.frtib.gov/