Anne Warmuth, Vancouver, Wash.
Northwest needs a good swift kick, as do many other companies that are ignoring divorced spouses. Under what’s known as a qualified domestic-relations order, you are a plan beneficiary. As such, you’re entitled to an individual benefit statement showing the current size of your pension. Many companies also show what it’s worth in monthly payments, starting at the age of 65. Under the pension law (ERISA), you’re entitled to your answer within 30 days of submitting a written request. You first wrote about a year ago. So far, Northwest is 366 days late.
It’s a pity your lawyer didn’t get you a statement at the time of divorce, which is the usual procedure. It’s also a pity that Northwest’s pension director, as well as those he referred you to, failed to tell you how to proceed. With little effort, we discovered pension rep Laurie Blexrud. She says she routinely answers these questions, but no one told her you were asking. Write her directly; she’ll solve your problem within 10 days.
For ex-spouses, yours isn’t an unusual experience. A company can be fined up to $100 a day for neglecting your letter, but it’s not what you’d call a hot area of law enforcement. Besides, why should you pay a lawyer to get you a statement you’re entitled to? Ex-spouses in a similar plight might try a certified letter to their company’s pension director, citing their rights as plan beneficiaries under ERISA, Section 105 (although certified mail didn’t work in Warmuth’s case). You might try your congressional representative. You might complain to the Department of Labor, Room N5619, 200 Constitution Ave. N.W., Washington D.C. 20210, enclosing a copy of your certified letter. Many women give up and play Pension Surprise. They don’t learn how large (or, more likely, how small) their pension is until they get it.
My wife and I are both 63 and retired. The bulk of our savings ($200,000) is invested in E or EE Savings Bonds, bought during the 1970s. They’ll mature in about two years. From a tax point of view, is it more prudent to convert them to HH bonds or to cash them in?
D. M., Butte, Mont.
Like many investors, you’re starting from the wrong end of this question. You’re thinking about taxes first and yield second. What you need most from your savings bonds is the highest income you can muster. If it costs you some taxes to get it, so what?
You have much more time than you think to consider this proposition. Series E and EE bonds pass through three types of maturity: (1) the original maturity, when the bond’s redemption value is guaranteed to equal its face value; (2) the extended maturity, lasting 10 years more, and (3) the final maturity. All bonds issued since December 1965 reach final maturity in 30 years (prior to that it was 40 years). So your bonds from the ’70s keep on paying until 2000 to 2009.
E-bond interest can be tax-deferred. But at each bond’s final maturity date, all of its earnings become taxable at once. The only way to continue to shelter those past earnings is to switch into Series HH bonds. Unfortunately, HH bonds are a lousy deal. The current taxable income they pay is pegged at a meager 4 percent for at least 10 years. If you cashed in your E bonds and bought 10-year Treasury notes instead, you’d get 7.25 percent.
To show you how the two compare, I turned to Dan Pederson of the Savings Bond Informer, a Detroit-based service that keeps track of bond values and maturities. Let’s say you bought a $1,000 E bond in July 1974 worth $3,174 today. If you rolled $3,000 into HH bonds (they come in $500 denominations), you’d earn a modest $120 a year. But look what happens if you cash in the bonds, get $2,496 after taxes in the 28 percent bracket and invest in Treasuries. Two 10-year T-notes (in $1,000 denominations) pay $145 in interest. If you added enough to buy three T-notes, you’d have $217.50. In the 15 percent bracket, buying Treasuries looks even better.
In short, a no-brainer. Cash in the bonds. You pay no state or local tax on Savings Bonds or Treasuries; there’s only a federal tax. Treasuries can be bought, at no sales charge, through any Federal Reserve Bank.
In 1987, we bought a single-premium life-insurance policy from MetLife, paying $23,830. We were told we would never owe another payment. Furthermore, our cash values would never earn less than 6 percent. But last year, MetLife told us that, due to the drop in interest rates, a new cost-of-insurance charge would be deducted from our policy. The result is that our guaranteed rate of 6 percent has dropped to a net of about 4.28 percent. I read the policy after I got it and noticed language allowing the charge, but my agent said it would never be imposed.
John Timberlake, Richmond, Va.
Rule One is to disbelieve any agent who contradicts the policy’s language. Rule Two is that when charges can be imposed they will be imposed, if interest rates decline enough. Without doubt, MetLife has reduced your return. But the company can keep a straight face when it says, “We did not alter your policy in any way.” You’re still getting 6 percent on cash values while MetLife takes its insurance charge. Double-talk, yes; illegal, no. The effect of the charge will decrease as the years go by, says actuary James Hunt of the National Insurance Consumer Organization, but your total return will always be less than appeared to be guaranteed.
Retired insurance professor Joseph Belth of Indiana University bristles at the way this type of insurance is typically sold. Agents highlight the investment return without explaining the effect of the policy’s charges – an approach he calls deceptive. So true.
