Financial Education: Read the Warning Labels
December 24, 2010I spoke with someone recently who just welcomed a new baby into her household. As we were talking, the conversation turned funny when we started talking about some of the warning labels on toys for children. My youngest child is almost 9, but one of the funniest things I have ever read was the warning label on one of the toys he received at a very young age. It was an ExerSaucer or something similar. The assembly instructions were fairly easy, but what really stood out was all of the warnings about product usage. If I recall correctly, the first two warnings were:
1. Do not use as a raft or flotation device.
2. Do not use as a sled or a toboggan.
I immediately wanted to meet the people who had done these things! Not all warning labels are as funny and not all warning labels are actually warning labels, either. Some warning labels come disguised as sales literature for financial products.
The same person who was welcoming a baby into her life had a 401(k) account from a prior employer, and her financial advisor recommended that she roll this over into a variable annuity. She had not decided whether or not to purchase the annuity before our conversation. We looked at the warning label (the fee disclosures!) on the proposed annuity. There was a 10 year “surrender charge,” which means that if she wanted to get out of the annuity (to change investments, advisors, or for poor performance, etc.) before that 10 year period she would have to pay a fee to do so. There were also fees for “mortality and expense” (the insurance component, sales charges, and administrative fees) and “management” (the investment component) that were in excess of 2 ½% per year. And, the track record of the investments inside the annuity was less than stellar. She decided to opt out of the annuity and transfer her prior plan to her current employer’s 401(k). The annuity’s “warning label” gave enough information about the product to make her consider another alternative.
Before you make a significant financial commitment, be sure that you fully understand the fine print on the warning labels.