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Beware the Hard Sell

By James Mentzer D’99

This article represents the personal views of the author and should not be considered either professional tax or legal advice. If you have questions concerning your own situation, please consult a personal adviser.

“Early retirement sounded wonderful to Janet Eisenberg. After saving religiously through the pension plans offered by Eastman Kodak Co., where she had worked as an administrative assistant for 33 years, she looked forward to retiring at 52.

She and fellow Kodak employees had confidence in the company-referred financial adviser’s assurances that their income would be higher in retirement than while they worked.

But, earlier this year, Eisenberg and three other former Kodak employees filed a claim in New York State court against their Morgan Stanley adviser, a former Wall Street stockbroker, for what they alleged were false promises.

This case is a sad example of a growing trend. Across our country, financial advisers encourage groups of employees to cash out of employer-sponsored retirement plans prematurely to reinvest the lump sum amounts with the adviser. Some use the power of workplace peer referrals to attract employees to seminars that offer a tempting combination of free food and free advice.

These presentations have become so prevalent that in 2006 the National Association of Securities Dealers issued an investor alert titled Look Before You Leave: Don’t Be Misled By Early Retirement Investment Pitches That Promise Too Much.

The hard sell is not limited to employees of Fortune-500 firms. Daily, pastors across America are subject to similar sales pitches. In eastern North Carolina, for example, there are financial advisers encouraging pastors nearing retirement to roll over funds from denominational pension plans into high sales commission options like equity-indexed annuities. The pitch does not mention the loss of special income tax sheltering for the funds being repositioned.

Section 107 of the federal Internal Revenue Code allows ministers of the gospel to exclude a “housing allowance” from taxable pension plan distributions received at retirement.

The loss of this benefit through the purchase of a personal retirement plan could cost money, rather than save you. In an actual case, a pastor was able to exclude $18,000 from 2007 taxable income. Transferring pension funds to a personal retirement plan would have caused this pastor to lose a valuable tax exclusion and significantly raised her tax bill.

It has become clear to me that the portion of soul and personality that equips us to be skilled pastors and preachers does not at the same time make us skilled managers of our personal finances. In fact, when I work with clergy, often it is the spouse who attends to family finances.

Thus, seeking competent financial advice is a must for many ministers. However, finding a good financial consultant is like finding a good spouse: not every person is suited for the position. One needs to take time to interview prospective financial planners. Choose someone with at least five years of experience in the financial services industry. Don’t offer to become part of someone’s “learning curve,” even if that person is the only child of your church’s lay leader.

When you interview a potential consultant, note how much time he or she takes to learn about your financial needs and your risk tolerance. Information about a “marvelous” investment at the very first meeting should serve as a red flag. Slick sales tactics and requests for fast decisions are rarely signs of competent financial advisers. You are seeking a person who will take the time to get to know your financial situation thoroughly and only then make recommendations for changes or new investments.

In the end, some basic questions up-front can prevent a world of financial heartaches. The right time to start this process is now. Whether you are 25 or 65, sound financial advice will help make retirement planning a task to anticipate—not dread!

The Rev. James G. Mentzer CLU, ChFC, has been a financial planner since 1985. He earned his master of divinity at Duke in 1999 and is the current director of planned giving for the United Methodist Foundation in Raleigh, N.C.