Is guaranteed growth investment wise?

By Malcolm Berko

Published: August 24, 2008

Dear Mr. Berko: My friend says Fidelity Investments had an advertisement in the newspapers talking about a guaranteed-income investment that would be good for the remainder of my life. My friend says that the income will always be the same and will never go down. He said he moved $27,000 from his independent retirement account to this Fidelity Growth and Income investment that guarantees 6 percent on that money right away, or $1,620 a year. I don't want to call Fidelity because I don't want to get sold a bill of goods by a smooth-talking salesman. However, I could invest $52,000 if you think this is a good thing.

Finally, the company I work for plans to provide long-term care insurance to its employees by using contributions to our 401(k) plans. The company will pay for the insurance with pre-tax dollars and then get tax-free benefits that would be classified as reimbursements for medical expenses. What do you think of this novel idea?

T.S., Oklahoma City

Dear T.S.: I don't think you ever have to be concerned about being sold a bill of goods by a smooth-talking Fidelity Investments salesman. Over the years, many folks I know have visited with lots of Fidelity advisers. For the most part they are courteous, informative, patient, helpful and knowledgeable — though some of them are noticeably more erudite than others. To the best of my knowledge, a Fidelity adviser has never encouraged or put pressure on a caller to purchase a product.

But I decided to find out for myself and called six Fidelity agents about the Fidelity Growth & Income Guaranteed invest advertisement. Not one of them tried to sell me the product. Each was professional, polite and clearly explained the investment, though some did a far superior job of describing it than the others.

The investment about which you asked is a variable annuity, and unlike most variable annuities, this one does not have a guaranteed minimum death benefit. A guaranteed minimum death benefit guarantees to pay at least the dollar amount invested in a variable annuity to a beneficiary in the event that the investor passes, even if the market value of the subaccounts is less than the original investment.

Because the Fidelity variable annuity does not offer this benefit (the cost averages about 0.75 percent) its annual annuity costs are lower than the industry average. Basically, this is a plain-vanilla variable annuity. The annual fees are 2 percent of the market value. That means Fidelity will deduct $1,040, or 2 percent of $52,000, in fees during the first year. This variable annuity will guarantee to pay you 6 percent — or 6 percent times $52,000 equaling $3,120 — in annual income every year for the rest of your life even if you live to be 107 and even if the value of the sub-accounts crash to $16,000 or $38,000 or $9,000. I believe that is a good thing. (However, variable annuities from AXA/Equitable, Ohio National and MetLife provide the same benefit plus many more very important options.)

If the value of your Fidelity variable annuity increases to $88,000, Fidelity will guarantee that you will receive 6 percent of that higher amount for the rest of your life, even if six years hence the sub-accounts crash to $16,000 or $38,000 or $9,000. The interest is taxed at ordinary income rates and there is a surrender fee of 2 percent should you decide to jump ship during the first five years.

Meanwhile, I think your employer and his accountant could be prime candidates for "Babblement,” Oaf Pharmaceutical's new vaccine for stupidity. An accountant I know who cooks the books for the Miami Mafia, the Gotti and Genovese crime families in New York, 29 U.S. representatives and eight U.S. senators tells me that the Internal Revenue Service won't allow it and that your boss is playing with the Racketeer and Corrupt Organizations Act, which could result in six years in a federal hotel.

This accountant says that money in a qualified retirement plan like your 401(k) cannot be used to purchase accident, health or long-term care insurance. Moreover, any employee who participates in such a plan would be violating the rules on early distributions and risk having his plan disqualified.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.

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