Data & Research September 10, 2008

Can This Be the Worst Economic State in 60 Years?

Fifty-three percent of Americans over the age of 60 say today’s economic conditions are worse than those they have experienced in the past.
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A new poll from the MetLife Mature Market Institute reports that an overwhelming majority of this group is feeling the pinch in the current economy and it has affected the way they spend their money, but not their plans for retirement. About a quarter of the Americans in this age group are taking proactive steps in the downturn, such as going to an adviser for more financial help.

A MetLife press release said 87% of respondents say they are curtailing their spending, with 70% cutting back on essentials such as food and transportation and 82% spending less on nonessentials such as dining out and vacation. In addition, 17% report having had to provide more financial assistance to family and/or friends as a result of the current economy, according to the announcement.

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However, of those who are working, 73% said they would not postpone their planned retirement date because of the state of the economy. Only 16% of all respondents are withdrawing or plan to withdraw more from their retirement funds than they originally planned.

“We discovered an increased appreciation of Social Security among one in five of the respondents. It is apparent from this data that, as a result of a volatile economy, many older Americans better understand the importance of guaranteed income,” said Sandra Timmermann, director of the MetLife Mature Market Institute, in the press release.

Who’s Responsible?

Ninety-two percent of those polled by MetLife classify the current state of the economy as “headed for” or “in the midst of’ a downturn, and 50% predict the poor economy will linger for an additional 12 months or longer. Sixty-three percent of those polled hold Washington responsible.

Democrats polled are far more negative about economic prospects compared to their Republican counterparts, with 62% of the Democrats believing that the downturn will last more than 12 months, compared with 34% of Republicans.

Other findings of the MetLife study, according to the press release, include:

  • More women have cut back on essentials than men (75% verse 63%).
  • Ninety-four percent of those who earn less than $35,000 a year have cut back on spending, compared with 72% of those who earn $75,000 or more a year.
  • Twenty-three percent say they are currently taking more positive action over finances (for instance, reading more about finances, seeking help from a financial adviser).
  • Fifty percent say what keeps them up at night is money-related.
  • With regard to increased fuel costs, a contributing factor in the economy, 60% of those polled are cutting back on auto transportation.

Harris Interactive fielded the study of 538 U.S. adults ages 60 and older.

Compliance September 10, 2008

New Jersey Court Clears Financial Planners of Wrongdoing

A New Jersey appellate court affirmed dismissal of fraud charges against advisers who recommended that a firm join a multiemployer welfare benefit plan.
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The court conceded that James W. Barrett, of Cigna Financial Advisors, and Gerard T. Papetti, of U.S. Financial Services Corporation, did not disclose all they knew about the potential tax risks of establishing what they represented was a “tax qualified,” “419 annuity” by participating in a program known as the Employers Participating Insurance Cooperative (EPIC). The court also agreed the advisers withheld revelation of the insurance company’s control over the amount and issuance of conversion credits, and that their remuneration was paid from Finderne Management Company’s EPIC contributions.

The court also agreed that Barrett and Papetti were subject to the state’s Consumer Fraud Act (CFA), concluding that the lack of uniform regulation of an occupational group defeats its recognition as “learned professionals” exempt from the CFA. The appellate court said the lack of state or federal licensure or regulation of “financial planners” subjects Barrett and Papetti to CFA liability. Papetti used the designation of CFP, certified financial planner.

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However, the court found that the EPIC plan did not fall under the scope of the CFA, warranting dismissal of the fraud charges. To be covered by the CFA, the purchase of the benefit must qualify as a consumer transaction generally of the type sold to the general public. The court determined EPIC was very complex and “it is clear this was a device to shelter income from taxation, which is not a consumer transaction as envisioned by the adopters of the CFA.”

The court further said it did not view plaintiffs as “unsophisticated buyers, victimized after being lured into EPIC through fraudulent, deceptive selling or advertising practices” since they sought advice from both an accountant and an attorney and since the EPIC documents were “replete with recommendations and disclaimers to seek independent guidance.”

Finally, the court rejected the plaintiffs’ argument that they should recover “benefit-of-the-bargain” damages equal to monies they lost due to the fact that the court would be required to enforce the EPIC plan provisions which were disallowed by the IRS.

Induced Participation

Plaintiffs Finderne Management Company, Inc. (FMC), Rocque Dameo and Daniel Dameo claimed Barrett and Papetti induced them to EPIC purporting it to be a multiple employer welfare benefit plan and trust that provided employers with a tax-deductible vehicle to fund pre-retirement death benefits for owner-employees through the purchase of specific life insurance products and allowed the individual insured to convert the insurance policy to obtain post-retirement benefits.

Six years after FMC commenced participation in EPIC, the Internal Revenue Service (IRS) audited the company and disallowed claimed deductions for two tax years. As a result of the IRS audit, plaintiffs paid additional taxes and interest deemed due. Thereafter, plaintiffs terminated participation in EPIC.

The plaintiffs sought recovery of losses allegedly resulting from Barrett and Papetti failing to warn them that the beneficial tax features of EPIC were not sanctioned by the IRS and failing to disclose they received commissions based on plaintiffs’ EPIC contributions. The plaintiffs also charged that Barrett and Papetti knew EPIC had no reserve fund to pay promised benefits upon the termination of participation because the contributions were used to pay the promoters’ commissions.

Prior to trial, defendants submitted a $350,000 offer of judgment, which the plaintiffs did not accept and the offer expired. A trial court entered judgment against Barrett and Papetti each for $36,734.60.

The case is Finderne Management Co. v. Barrett, N.J. Super. Ct. App. Div., No. A-1057-05T5, 9/9/08.

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