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Prudential Securities Inc., AEGON USA Inc., and several AEGON USA subsidiaries have been sued for inappropriately pitching variable annuities for their tax-deferral feature to investors to fund retirement plans that are already tax-deferred.
| Consumers frequently buy annuities on the strength of the tax-deferral feature, but end up incurring increased fees and costs. |
The suit, filed June 8 in New York State Supreme Court by Wolf Haldenstein Adler Freeman & Herz LLP, alleges that Prudential sold annuities to investors that would fund their Individual Retirement Acounts on the promise that money in the annuity will grow on a tax-deferred basis. However, earnings placed in any qualified plan (such as an IRA) already grow tax-deferred. The suit contends that consumers buy annuities for their tax-deferral feature, but end up incurring other fees and costs, including mortality and expense fees and agent commissions, that weren't fully disclosed to them.
The suit further claims that insurance agents are motivated to recommend annuities even though they may not be appropriate to all investors because agents "obtain double, or triple, or more than the normal commission rate for regular investment products [like mutual funds or individual securities]." The companies' "sales presentations, materials, contracts, and prospectuses mislead customers into believing that deferred annuities may be appropriate investments, and fail to disclose the inappropriateness and unsuitability of such investments, and the highly remote circumstances in which the expensive insurance features can provide any value," the suit states.
The suit names Prudential as the seller of the annuities in question and AEGON USA and its subsidiaries as designers of the products. The subsidiaries named are AEGON Financial Services Group, AFSG Securities Corp., AUSA Life Insurance Co., Bankers United Life Assurance Co., PFL Life Insurance Co., and Western Reserve Life Assurance Co.
Susan Altran, a spokesperson for Prudential, and Rosemary Kostmayer, a spokesperson for AEGON USA, both declined to comment on the suit.
The plaintiffs, Kazimierz and Margaret Dudek of Florida, invested $13,000 and $7,000, respectively, in qualified variable annuities from Prudential Securities in November 1993. The Dudeks' financial advisor suggested that they buy the annuities and place them inside of two IRAs so the annuities' subaccounts would accumulate money on a tax-deferred basis. The suit claims the Dudeks were not told by the advisor that "a deferred annuity is inappropriate and unsuitable for placement in an IRA."
However, the Dudeks claim that the quarterly statements they received failed to disclose the annuity fees, and "incorrectly and misleadingly stated the 'net amount invested' by subtracting fees paid and distributions received from the 'total premium payments,'" according to the suit. The Dudeks also claim that Prudential did not deduct fees from the net amount invested in the statements, and thus misled them into thinking their investments performed better than they actually did.
The Dudeks also claim Prudential did not disclose that, by law, they were required to make annuity withdrawals early into their contract because of their advanced age. "Such forced withdrawals defeat the entire purpose of the annuity and the front-loading expense in such accounts," the suit says. In December 1998, the Dudeks paid surrender fees to cancel their annuity contracts.
The lawsuit is seeking nationwide class action status. Class members include anyone who purchased an individual deferred annuity contract or received a certificate to a group annuity contract from Prudential Securities used to fund a retirement plan such as an IRA, 401(k), 403(b), or any other tax-deferred savings plan.
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