Dear Liz: I got scammed by a magazine company a year ago. I thought the call was about two magazines I wanted to stop as I was moving. The woman talked fast and took me through the steps with my bank card (which was stupid of me, I now know) as if she was helping and at the end she said, "Oh, those are not our magazines." Two weeks later I was receiving about eight magazines I do not want. I changed my bank card so the withdrawals would stop, but I get so many collection calls. I hang up and block that number, but then I get more. My bank manager said consumers don't have to pay for what they don't want. I have told the collectors that, but they still send bills for $1,200 for three years of magazines.
Answer: Don't expect collectors for scam artists to help you out. Amy Nofziger, regional director for the AARP Foundation, recommends you contact your state's attorney general to file a complaint.
"Magazine subscriptions like this are still a huge complaint and the AGs need to know about it, so they [can] file enforcement against the company if needed," Nofziger said.
You must follow certain procedures to request that the debt collection agency stop contacting you. The AG's office may be able to help or there may be a separate collection agency board you need to contact. The Federal Trade Commission also has guidance at www.consumer.ftc.gov/articles/0149-debt-collection.
Annuities and fees
Dear Liz: I must object to a point you made in a recent column. You wrote: "...Also, annuities often have high fees, so you'd need to shop carefully and understand how the surrender charges work." To write "...annuities often have high fees" is misleading, because there are annuities that don't have fees, such as fixed annuities and indexed annuities. Coupling that phrase about fees with the admonition "you'd need to shop carefully and understand how the surrender charges work" is also a disservice to the public. Of course, an investor has to understand surrender charges! Just like if they try to end a bank CD too soon, there's a penalty, or if they try to get out of a real estate deal incorrectly, or if they commit some other kind of breach of contract. That doesn't mean that annuities are bad investments, especially when their principal is guaranteed, and no fees to pay.
Answer: Thanks for bringing up two areas of confusion that are actually linked.
All investments have costs. Many, including mutual funds and variable annuities, explicitly state their fees. With fixed and indexed annuities, the cost isn't disclosed. Instead, it's built into the interest rate spread — the difference between what the insurer earns on your money and what it pays into your account, said financial planner Michael Kitces, partner and director of financial planning research at Pinnacle Advisory Group in Columbia, Md.
"In other words, if the annuity company pays 2.5% on its annuity, it likely earned closer to 3% or 3.5% in the first place," Kitces said. The insurer keeps the remainder to recover commissions paid to the insurance agent and the annuity's own profit margins, he said.
Indexed annuities are a little more complicated. These promise investors they will get a certain portion of the return earned by some market benchmark while protecting them from market losses. The insurers use the spread to cover their overhead costs, profits and commissions. But instead of paying the remaining yield into your account, insurers use the money to purchase options that provide the promised participation rate in the index, said Kitces, who writes the Nerd's Eye View blog at kitces.com.
Either way, surrender charges encourage people to stay invested long enough for the insurance company to get back enough money from the interest rate spread to cover the cost of commissions. If people need their money during the first few years, the surrender charge they pay is designed to make up the difference between what the insurer paid out and what it has received from the yield spread. Surrender charges are typically around 7% to 9% and may persist for seven or more years, although the penalty declines over time.
You've heard that "there's no such thing as a free lunch." Investors need to understand that they're paying a price for their investments, even if they can't see the money directly coming out of their pockets. Costs are a drag on investor returns and how big their portfolios can grow. That's why it's important to minimize those costs. When insurers don't disclose the costs, it's hard to know how much you're giving up compared to what you could earn from another investment.