A free steak dinner, a no-risk annuity and a push to move our IRA. Is he right?

The question

An illustrative letter.

The answer

My dear, I am glad you enjoyed the steak, and gladder still that you wrote before signing anything. Your instinct is a good one. In my years in banking I learned that the most expensive meals are often the free ones, because the bill arrives later, folded into a contract.

Are free dinner seminars really educational?

Regulators looked into this question closely. In a joint examination, the Securities and Exchange Commission, FINRA and state securities regulators reviewed 110 firms that sponsored free-meal investment seminars. Every single seminar turned out to be a sales presentation, even when it was advertised as educational or promised that nothing would be sold. Half used exaggerated or misleading claims. About a quarter involved recommendations that may have been unsuitable, and 13 percent appeared to be fraudulent. That was years ago, but the format has not changed much, and neither has the purpose.

None of this means your speaker is dishonest. It means the evening was designed to sell, and the right response to a sales evening is to slow down.

Can an annuity really beat the market without risk?

No investment offers market-beating returns with no risk at all. The products usually pitched this way are fixed indexed annuities. They link your returns to a stock index, and they protect you from losing money when the index falls. That protection is real, and for some people it is valuable. But it is paid for by limits on the upside.

Most indexed annuities use a cap or a participation rate. With a 7 percent cap, a year in which the index rises 12 percent credits you only 7 percent. With a 75 percent participation rate, you receive three quarters of the index's gain. In strong years, you will trail the market by design. Protection from losses, yes. Beating the market without risk, no.

What does it cost to change my mind?

This is the question that matters most. Most annuities carry surrender charges if you take out more than a small amount in the early years, usually for somewhere between six and ten years. The charge often starts high and falls a little each year. Move your whole IRA into one and then need the money for a roof, a car or a health emergency, and part of your savings goes to the insurance company rather than to you.

Does an annuity make sense inside an IRA?

One of the selling points of an annuity is that its growth is tax-deferred. But your IRA is already tax-deferred. Putting an annuity inside it gives you no extra tax advantage, while often adding fees. There can be other reasons to want one, such as guaranteed lifetime income, but tax deferral is not one of them. Remember, too, that once you are 73, your IRA must pay out required minimum distributions each year, and any annuity inside it has to allow for that.

How do I check the person selling it?

• FINRA BrokerCheck shows whether someone is registered to sell securities and lists any complaints or disciplinary actions.
• The SEC's Investment Adviser Public Disclosure site does the same for investment advisers.
• The Arizona Department of Insurance and Financial Institutions can confirm whether someone holds an insurance license, which is what is needed to sell most annuities.

Look before the next meeting, not after.

What questions should I ask before deciding?

• How are you paid on this sale, and how much?
• What is the surrender charge in each year, and for how many years?
• What are the caps or participation rates, and can the company change them after I buy?
• Are there fees for riders or income guarantees?
• What does this give me inside my IRA that I do not already have?
• What happens if I need half the money in year two?

Ask for the answers in writing. An honest seller will welcome the questions.

What if I have already signed?

Annuities come with a free-look period, a window after the contract arrives in which you can cancel and get your money back. In Arizona, buyers aged 65 or older have 30 days. Check your contract for the exact period and act inside it.

What about the pressure to decide this week?

Urgency is a sales tool, not a feature of good investments. Retirement savings took you a lifetime to build. They deserve weeks of thought, a second opinion from someone with nothing to sell you, such as a fee-only financial planner, and a conversation at your own kitchen table rather than a hotel banquet room.

Enjoy the memory of the steak, my dear. Then take the folder home, put it on the table, and let it wait. If the offer cannot survive a month of questions, it was not an offer worth taking.

One thing to do this week

Look the speaker up on FINRA BrokerCheck and with Arizona's insurance department, and write down how he would be paid.