SUNDAY, AUGUST 1, 2010
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Business insurers from G4
dormant for more than three years. In New York, funds in an ac- count that remains dormant for more than three years may be turned over to the state. Phoenix spokeswoman Alice Ericson said the company now has a policy of sending letters to people whose accounts have been inactive for two years.
‘Euphemistically named’
A few people have sued in- surers over the use of retained- asset accounts. Prudential won a lawsuit in 2009 in which a survi- vor complained about the Alli- ance Account. MetLife has a case pending in which a survivor says she was cheated by the retained- asset account. In court-filed pa- pers, MetLife denies any wrong- doing. There has been only one ruling by a federal appellate court on the substance of such accounts — and it went against an insurance com- pany. After a federal judge in Boston dismissed a policyholder suit claiming that Chattanooga, Tenn.-based insurer Unum Group was stealing account earnings from survivors, the U.S. Court of Appeals for the 1st Circuit over- ruled the lower court in 2008. It reinstated the case. “The euphemistically named
‘Security Account,’ accompanied with a checkbook, was no more than an IOU which did not trans- fer the funds to which the benefi- ciaries were entitled out of the plan assets,” the three-judge pan- el wrote. Unum spokeswoman Mary
Clarke Guenther said retained- asset accounts are a commonly accepted practice in the industry. The case is pending. Absent regulatory or legal in-
tervention, bereaved family mem- bers such as Cindy Lohman will continue to find death benefits going into retained-asset ac- counts. Her son, Ryan, posthu- mously received a Purple Heart and Bronze Star for sacrificing his life to save fellow soldiers in Af- ghanistan in August 2008. He had ordered a Humvee to
swerve to avoid an explosive de- vice, exposing himself to its dead- ly blast. Three days after learning of her
son’s death, Lohman said, an Army casualty assistance officer came to her home, explaining that Ryan had a life insurance policy and that her signature was needed to release the money. “By signing that, it forced me to accept the reality that he was dead and not coming back,” she said.
‘If they had told me’ Since 1999, the VA has allowed
Prudential to send survivors “checkbooks” tied to its Alliance
MetLife’s $2 billion ace Te United States provides life insurance for federal employees, paying benefits through MetLife with so-called “checkbooks.”
Te United States gives workers the Federal Employees’ Group Life
Insurance 217-page handbook, saying death benefits will be paid via a “money market account
checkbook.” SOURCES: MetLife, U.S. Government
Te government sends premiums for 4 million workers and retirees annually to MetLife’s Office of Federal Employees’ Group Life
Insurance unit.
MetLife holds $2 billion in claims every year, now paying 0.5 percent interest to survivors if they leave money in accounts. Te company made 5.4 percent in the first quarter of 2010 on investments.
THE WASHINGTON POST
‘That’s misleading’ Prudential, which has had the
insurance contract with the VA since 1965, pitched the checkbook payout to the VA in 1999 as an added benefit to survivors, Wurtz said. The government agency ac- cepted Prudential’s offer. “Maybe I didn’t ask enough questions,” he said. Printed on each “check,” next to
“Prudential’s Alliance Account,” is the name of J.P. Morgan, the sec- ond-biggest U.S. bank by assets. J.P. Morgan spokesman Murray declined to say how much the bank is paid for its role with Pru- dential. The way Prudential has set up
the “checks” implies that J.P. Mor- gan stands behind the accounts and that they are thus backed by the FDIC, Duke’s Baxter said. “That’s misleading the benefi-
ciaries,” he said. Prudential’s DeFillippo said,
DAVID EVANS/BLOOMBERG NEWS Gerry Goldsholle, a former president of MetLife Marketing, invented retained-asset accounts in 1984.
Account. In 2009 alone, the fami- lies of U.S. soldiers and veterans were supposed to be paid death benefits totaling $1 billion imme- diately, according to their insur- ance policies. They weren’t. Prudential’s VA policies prom- ise either a lump-sum payout or 36 monthly payments. About 90 percent of survivors, including Lohman, choose to receive the full amount upfront. When they do, they don’t get a check; they get a “checkbook.” Under a 2008 law, survivors covered by Prudential’s VA policy are allowed one year to put death benefits into a Roth individual re-
tirement account, allowing them to earn investment gains for the rest of their lives tax-free. Pruden- tial never informed Lohman, she said.
“I definitely would have done
that if they had told me,” Lohman said. Even Stephen Wurtz, deputy assistant director for insurance at the VA, who has overseen the in- surance program for 25 years, has been kept in the dark by Pruden- tial.
“Prudential runs the program on a cost-reimbursement basis only,” he initially said, referring to the $4.2 million in fees the VA
paid Prudential in 2009. “They’re really good guys. They do it patri- otically. They don’t make any money from the Alliance Ac- count.” Wurtz, 62, said he had believed
that the Alliance Account money went into a bank. After he learned that the payouts stayed in Pru- dential’s general fund, Wurtz said, he asked Prudential how much money the insurance com- pany made from these accounts and how many dollars it held in retained assets. Prudential declined to answer,
saying that information was pro- prietary, Wurtz said.
Veterans Affairs, N.Y.’s Cuomo to investigate insurers’ practices
After the online publication of this Bloomberg Markets investigation, the Department of Veterans Affairs said Wednesday that it is investigating Prudential’s use of retained-asset accounts. Defense Secretary Robert M. Gates said his agency will assist the VA’s investigation, and White House spokesman Nick Shapiro said President
Obama “supports the VA’s immediate investigation” into the “unacceptable” practices. New York Attorney General
Andrew Cuomo began a fraud probe into the use of the accounts. On Thursday, Cuomo subpoenaed MetLife, Prudential Financial and six additional insurers for information about profits on death benefits
retained from the families of deceased policyholders, including military personnel. “It is shocking and plain wrong for these multinational life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members,” Cuomo said.
— David Evans
“We disclose the roles of all com- panies involved in administering these accounts.” J.P. Morgan’s Murray declined to comment. Prudential’s general account earned 4.4 percent in 2009, most- ly from bond investments, ac- cording to SEC filings. The com- pany has paid survivors 0.5 per- cent in 2010. “It’s shameful that an insur- ance company is stealing money from the families of our fallen ser- vicemen,” said Paul Sullivan, who served in the Persian Gulf War as an Army cavalry scout and is now executive director of Veterans for Common Sense, a nonprofit ad- vocacy group based in Washing- ton. “I’m outraged.” Sullivan, a project manager at
the VA’s benefits unit from 2000 to 2006, said he was never told Prudential kept money and earned investment gains from soldiers’ insurance payouts in- stead of sending it to survivors. “There shouldn’t be secret prof-
its,” he said. “This should be transparent. The lack of oversight is appalling.” It’s not much different for the 4 million non-military U.S. govern- ment employees and retirees — including staff of the FDIC — cov- ered by MetLife policies. That
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Even regulators in the dark about where money is kept 1 23
program, begun in 1965, averages more than $2 billion in death benefits claimed every year, the government said. Payouts are handled by the Of-
fice of Federal Employees’ Group Life Insurance. That makes it look as if the government is taking care of its employees’ insurance coverage. It isn’t. That “office” is a unit of MetLife.
Edmund Byrnes, a spokesman for the Office of Personnel Man- agement, which oversees Met- Life’s federal employee contract, said MetLife segregates death benefits into beneficiary accounts after it approves death claims. “Once MetLife transfers the funds to the Total Control Ac- count, the monies are no longer under MetLife’s control,” Byrnes said. MetLife spokesman Madden
said something different. “The assets that back the liabil- ities on all the TCAs are placed in MetLife’s general account,” he said.
At the VA office, Wurtz, a civil- ian employee, said he now under- stands for the first time that, be- cause he’s covered by the federal insurance program, his wife could receive a MetLife “check- book” someday.
‘Ripping off their own’ “Uncle Sam is ripping off their
own,” Wurtz said. “My wife would get the money, and they would blood-suck some of it out of her.” It took Wurtz, who’s been work- ing with insurers for most of his career, more than a decade to un- derstand how retained-asset ac- counts work. Companies such as MetLife and Prudential have nev- er told millions of Americans with insurance policies that when they die, the insurer plans to hold their family’s money in its own ac- count to make investment gains from the death benefit. “It’s outrageous that some-
body’s profiting off other people’s grief,” saidMark Umbrell of Doyl- estown, Pa. His son Colby, 26 and an Army Airborne Ranger who earned a Bronze Starand a Purple Heart, was killed in Iraq in 2007. Umbrell received a “checkbook” account.
“I think we’re being taken,” he
said. The question for Umbrell, Loh- man and a million others with these accounts is whether any- thing will change. State bank reg- ulators say that if there are to be any reforms, they should be made by insurance departments. Offi- cials at those state agencies often say they don’t even understand what a retained-asset account is. “It’s flown under the radar,” said Stempel, the UNLV profes- sor. “Regulators have not done their job.”
A version of this story appears in the September issue of Bloomberg Markets Magazine.
Gauging the power — and problems — of small business small business from G1
slowly and shed about as many jobs as they create. In a 2008 study, the Small Busi- ness Administration concluded that companies with gangbuster job growth — what researchers called “high-impact’’ companies and others refer to as gazelles — constitute only 2 or 3 percent of the nation’s companies. The superstars came in all shapes and sizes. They included legions of tiny companies with fewer than 20 workers. Those firms generated about one-third of the new jobs, according to the study. About 43 percent of the jobs came from corporations with more than 500 workers, and an- other 24 percent came from firms with 20 to 500 workers. Not surprisingly, companies with gangbuster growth defy easy stereotypes. Although some were high-tech start-ups such as Goo- gle, most had been around for years before they took off. The average “high-impact’’ company was 25 years old. That doesn’t mean small com- panies aren’t a big pillar of the job market. Whether or not they grow rapidly, companies with fewer than 250 workers provide almost half of all private-sector jobs, ac- cording to the Bureau of Labor Statistics. About 38 percent of all workers are in companies with fewer than 100 employees. When those companies shed jobs, as they have in droves over the past two years, the losses have a big impact on overall employment. Analysts say small businesses
suffered disproportionate harm in the downturn, in part because banks couldn’t or wouldn’t make as many loans.
Small companies were among
the first to resume hiring after the recessions of the early 1990s and
isn’t a shortage of capital but a shortage of healthy borrowers. In the National Federation of Inde- pendent Business’s July survey, al- though nearly half said they couldn’t get enough credit, only 6 percent of business owners said that was their biggest problem. By contrast, 30 percent said their biggest obstacle was weak sales. Many small-business owners lost creditworthiness as they struggled in the downturn. Plung- ing property values have made it harder for entrepreneurs to use homes or commercial property as collateral.
AUGUSTO F. MENEZES/ASSOCIATED PRESS Small businesses “are going to lead this recovery,” President Obama said last week in Edison, N.J.
2001. Not this time. Although the economy has added about 600,000 private-sector jobs this year, surveys of small-business owners indicate that, as a group, they have barely begun to hire. In recent monthly surveys by
the National Federation of Inde- pendent Business, small-business owners have been about as bleak as at any time since the surveys were started in 1986. And in a July survey by the National Small Business Association, 41 percent of companies said they couldn’t raise as much money as they needed – the highest share in 17 years, according to the trade group. What to do? The Obama administration is pushing hard for a bill that would create a $30 billion small-busi- ness lending fund, expand lend- ing through the Small Business Administration and provide sev- eral billion dollars worth of new tax breaks. The House passed one version
of the bill in June. Senate Repub- licans blocked votes on a similar bill Thursday, and the Senate may have to shelve the measure until after its break. “The lack of credit for small business is a problem,” said Sen. Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee. But he said the government should not try to fix the problem with “another ex- pensive and bureaucratic govern- ment program.” Supporters say the $30 billion fund, which would invest in small community banks, would allow the banks to leverage the money and make almost $300 billion in additional loans. The Congres- sional Budget Office has estimat- ed that the fund would not cost the government in the long term, as the banks repay the Treasury Department with interest. “I travel all over the country and I see small businesses that are ready to grow, but they need working capital,” said Karen G.
Mills, administrator of the Small Business Administration. “We know that banks are starved for capital to give to good business- es.”
The new money could make a real difference, but only if the community banks actually use it. Much will depend on the econo- my itself. Loan volumes actually declined
after the Treasury poured money into banks under the Troubled As- sets Relief Program, in part be- cause the recession reduced prof- itable lending opportunities. The bill does try to prod banks into lending. Banks that step up their pace will be allowed to repay the government at much lower in- terest rates than banks that stay on the sidelines.
Another wild card is the atti- tude of bank regulators. Bankers and small-business lobbyists wor- ry that regulators, determined to minimize risk, will insist on rigid loan guidelines. But critics say the real problem
Bill Owens, founder of Educa- tion Solutions in Shelby, N.C., pro- vides a case study in the murki- ness of the lending equation. Ow- ens, who developed a cheap way to provide whiteboards to cash- strapped schools, said he has a backlog of orders. But because his credit rating has slipped in the past two years, he can’t get loans to stock up on materials Analysts say that is a big reason
that small-business lending is still weak. “A small-business loan is, at its
heart, a contract between two parties: a bank that is willing and able to lend, and a business that is creditworthy,’’ the congressional panel overseeing TARP said in a May report. “Due to the recession, relatively few small businesses now fit that description.” Carmen Ortiz Larsen, founder
of Bethesda-based Aquas, is reluc- tant to ask her bank for more credit. Aquas, which provides en- gineering and information tech- nology services, has 32 employ- ees. Larsen said she would like to expand but worries that asking for a bigger loan could prompt her bank to question her existing credit lines. “It’s a chicken-and-egg thing,’’ Larsen said. “I don’t want to stir
the pot too much. I need to hang on to the credit I’ve got.”
Small-business lobbying groups disagree about what to do. The National Small Business
Association, which says it repre- sents 150,000 small firms, has said the new lending fund could greatly ease the credit crunch for many of its members. But Todd McCracken, the group’s president, said much will depend on how much regulators insist on tighter loan standards. “We have supported something along these lines for more than a year,’’ he said. “My only caveat is that this bill is not a silver bullet and can be undermined by tight regulatory standards.’’ But the National Federation of
Independent Business, which says it represents about 300,000 businesses, has been lukewarm. In a recent statement, the group said the small-business lending fund “has the potential to help creditworthy small business- es.” But it complained that the bill didn’t address the most pressing problems facing small business — the lack of sales and customers. William C. Dunkelberg, the
NFIB’s chief economist, has been even more critical and charged that the bill was all but irrelevant. “Congress is fixated on credit
. . . and that won’t sustain or sup- port faster growth,’’ Dunkelberg wrote in June. “Washington is ap- plying leeches and performing blood-letting as a cure.” Supporters of the bill acknowl-
edge that it won’t be a cure-all, but they say it deals with a real problem. Said SBA administrator Mills:
“The more capital the banks have, the more ability they have to make loans to small business.”
Washington Post staff writer Michael A. Fletcher contributed to this report.
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