Variable annuity in 401k, what to do?


B

BMS

Not all variable annuities are the same. For small companies, a product
called a Master Variable Annuity is used for the defined contribution plan.

This is a good one. It lacks the surrender charges and is an economical way
for small businesses to offer 401k plans at reduced costs, when other plans
would be too expensive.

Ask for the HR person to e-mail you either the plan summary or the web
address of the provider.
 
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E

Elle

ScottF" said:
Regardless of that, to answer your other questions, my company will
match 4%. I have e mailed the plan administrator to find out what my
options are. I e mailed him over 2 weeks ago and got no response so I
forwarded the same message to him again yesterday to find out if I have
other options. I work in a very LEAN orginazation (4 employees,
including the owner).
I presume this is a new employer, and so it's not a good idea to rock the
boat, and you're perhaps in a very tough situation. As you probably know, I
don't know how wise it is to push the issue at this point. Depends I suppose
on how much you value your job.

If you haven't already, then document all your communications, at a minimum.
I personally would be on the phone to the 401(k) administrators, telling
them politely I'd changed my mind, so could they cancel the paperwork? But
maybe you've done this, too...

I am curious, though: Are you dealing with some outside contractor who sets
up your small company's 401(k)? Seems to me one could be more aggressive
with such an outside entity.
Could this have anything to do with why this guy
sold us an annuity as our 401k investment vehicle? I am trying not to
condemn this guy without knowing as many facts as I can.
I leave it to others with more specific experience with small company 401k's
to comment.

As you pointed out, fortunately it's "only" $9k, and it's not like this
money was stolen from you. You should be able to get your hands on it at
some point. Plus, I'm sure there are worse places than an annuity to put
one's retirement money.
 
S

ScottF

Elle said:
"ScottF" (e-mail address removed) wrote-
.-

Have you at least tried to speak to your company's administrator to
cancel
the processing of this paperwork?

It's only Sept. 8. Seems to me there might be hope. It never hurts to
ask.

(I echo Tad's comments about not transferring this 9k to the 401k. Put
it in
an IRA instead.)
-
I am 32 and the amount going into the 401k from
IRA is only about 9k. Maybe I should just not contribute to 401k and
start Roth for wife and I? What do you guys think?-

Are you sure this variable annuity is thee only possible option within
this
401k?

How much of your future contributions to the 401k does the company
match?
-
In 2.5 to 3 years will be debt free except house and will have a good
deal available/month to invest.-

Good for you. Living within one's means is the first step towards
accumulating wealth.

Don't be shy about asking how to allocate among investment options
(stocks,
international, mutual funds, bonds, bond funds, CDs) the money you
have,
say, in an IRA or elsewhere, here.
I guess that I misspoke myself in my original post. The 9k is from a
previous employers 401k plan and it was parked in some kind of account
by the new company's administrator(maybe just a money market type
account) until I became eligible to enroll in the new company's 401k
plan. So I think he actually called it a roll over account or
something.
Regardless of that, to answer your other questions, my company will
match 4%. I have e mailed the plan administrator to find out what my
options are. I e mailed him over 2 weeks ago and got no response so I
forwarded the same message to him again yesterday to find out if I have
other options. I work in a very LEAN orginazation (4 employees,
including the owner). Could this have anything to do with why this guy
sold us an annuity as our 401k investment vehicle? I am trying not to
condemn this guy without knowing as many facts as I can.

Scott
 
T

Tad Borek

ScottF said:
I guess that I misspoke myself in my original post. The 9k is from a
previous employers 401k plan and it was parked in some kind of account
by the new company's administrator(maybe just a money market type
account) until I became eligible to enroll in the new company's 401k
plan. So I think he actually called it a roll over account or
something.
Most likely a Rollover IRA, you should verify exactly where the dollars
are, how they're invested, and whether they're already committed to the
new 401k. Again, there are benefits to keeping that $ out of your new
401k plan. You can open a Rollover IRA all sorts of places - banks,
brokerage firms, mutual fund companies - it's just another type of
account really. So you can invest IRA dollars in a wide range of
alternatives. As you've seen that's not the case with a 401k where
you're limited to the plan's options.

Regardless of that, to answer your other questions, my company will
match 4%. I have e mailed the plan administrator to find out what my
options are. I e mailed him over 2 weeks ago and got no response so I
forwarded the same message to him again yesterday to find out if I have
other options. I work in a very LEAN orginazation (4 employees,
including the owner). Could this have anything to do with why this guy
sold us an annuity as our 401k investment vehicle?
Yes, it does...it's essentially a way to cover the costs associated with
small-employer plans. On the bright side, you have a plan, and a 4%
match, which is more than you get at the typical 4-employee business.

-Tad
 
E

Elle

Tad Borek said:
Yes, it does...it's essentially a way to cover the costs associated with
small-employer plans.
In support of this is the following:
---
Variable annuity contracts are used most frequently by plans with 250 or
fewer participants. Annuities generally offer a higher rate of compensation
to brokers
than some of the other investment products. This differential compensation
is needed to encourage brokers to reach small plans but also contributes to
the higher
average level of per-participant plan expenses among small plans.
...
Variable annuity contracts are popular among small plans for several
reasons. They are used frequently by brokers who sell prototype plans to
small companies, particularly independent brokers, insurance agents, and
financial planners. The annuity wrap on this type of product provides a
marketing allowance to compensate brokers, and asset-based administrative
fees to pay the service provider. These commissions and fees on variable
annuities enable the provider to sell the plan less expensively than with
other types of vehicles and to make a profit on administering and managing
assets for small plans. The asset-based fees which are charged to the plan
(participants) also make plan expenses more manageable for small companies.
---
Research Report, Winter 1995, INVESTMENT COMPANY INSTITUTE
"401(k) Plans: How Plan Sponsors See the Marketplace"

http://www.ici.org/pdf/rpt_401k.pdf

In the vein of ScottF's original concerns, from the financial guru Clark
Howard:
---
The time to buy an annuity is NEVER! - May 18, 2005
Clark wants to talk again about variable annuities and the damage they can
do to seniors' bank accounts. Road shows where variable annuities are sold
are popping up all over the country. The target is "nursing home age" people
and the hook is a free meal. Once the salespeople have them hooked, they
push annuities with a 7 percent guarantee on investment. Sounds impressive
right? Well, what these people aren't told is that annuities have huge
commissions that eat up your money. In addition, the penalty to get out of
an annuity is 17.5 percent of the money you invested. And the 7 percent is
not a guarantee at all. So, in sum, there is never a time when people -
older folks especially - should buy a variable annuity. The groups that are
supposed to regulate this industry are doing nothing. So, it's up to you to
protect your money and to tell your relatives about it. If your parents tell
you they that they have gotten an invitation to a free breakfast, tell them
not to go and treat them to a breakfast yourself.
---

So when one's only choice is a variable annuity, I wonder if the numbers and
statistics (based on past performance of other vehicles), indicate an
employer match up to the first 4% (or whatever) of one's salarly being
contributed is worth it. I would hope so; I would think so. Still, it seems
to me, the smaller the company, the more deserving of investigation the
small print on the 401(k)'s variable annuity one should be.
 
T

Tad Borek

Elle said:
In the vein of ScottF's original concerns, from the financial guru Clark
Howard:
"Guru?"...that's uncharacteristically generous Elle! Anyway that snippet
discusses senior citizens buying variable annuities are pitched at
nursing homes..which isn't really relevant to Scott's decision about a
401k. And any guru would know that saying "never" is crazy talk. For a
lot of employees VAs are all there has been to choose from (403b plans
used by teachers and nonprofits come to mind). I have a client wrapping
up many years of participation (these plans date to the early 1960s) and
it would have been nuts to avoid contributing to the plan just because
VAs were all that was available.

Scott, VAs get a lot of bad press (much of it deserved, I think) but
yours is a different kind of situation. Certainly, look at the available
sub-accounts and the overall costs of the VA - it's just like any 401k,
if it's all garbage, you might not bother participating, and contribute
to an IRA instead. This is especially true if you plan to contribute
less than the IRA contribution limit anyway ($4,000/yr) and the higher
401k contribution limit ($14,000 plus employer matches) isn't a benefit
to you. Let's say you plan to save $2k/yr towards retirement right now -
you can do that anyway, in an IRA. By skipping the 401k you'd give up
that 4% match though, and the match could go a long way towards
offsetting costs associated with the VA.

Also you should find out what restrictions there are on moving the money
out of the VA should you change employers, or should your employer adopt
a new 401k plan with better options. If you can transfer it elsewhere,
and the money might not be in the VA all that long, then less-than-ideal
sub-accounts might not be too much of an issue for you. Pick something
you can live with, enjoy the 4% match, and sit on your hands until
you're able to do something better.

-Tad
 
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T

Tad Borek

Elle said:
Clark Howard, Suze Orman, Dave Ramsey, et al. are all (personal) financial
gurus who regularly subject their comments to massive scrutiny via
broadcasting. Their commentary is highly polished and well-written. You
imply you wish I would show the same "generosity" with some here, calling
them "gurus."
Oh, not at all, I just didn't think you'd bestow guru status on a
TV/radio personality. Not to demonize them or anything, but
unfortunately the medium lends itself to sound bites, stuff you couldn't
get away with if you're actually paid for advice. This is a good example
really..."never buy annuities!"...when the issues are of course more
complicated than just that.
Do you sell or broker or otherwise stand to profit from promoting annuities?

I think it's important to provide such disclosures.
Sure it's important, and if I sold annuities I'd say that...but I don't.

-Tad
 
E

Elle

"Guru?"...that's uncharacteristically generous Elle!
Clark Howard, Suze Orman, Dave Ramsey, et al. are all (personal) financial
gurus who regularly subject their comments to massive scrutiny via
broadcasting. Their commentary is highly polished and well-written. You
imply you wish I would show the same "generosity" with some here, calling
them "gurus." MIFP as a whole can offer some guru-like insight, but there
are inevitable restrictions in this medium (Usenet newsgroups, moderated or
not) that preclude the same sort of professionalism displayed by Howard et
al. For example, Mr. Howard does not pepper his commentary with ego-laden,
irrelevant remarks... ;-)

Howard, Orman, Ramsey... their programs and commentary are worth a lot and
largely obtainable at no cost. So I recommend them to others.
Anyway that snippet
discusses senior citizens buying variable annuities are pitched at
nursing homes..which isn't really relevant to Scott's decision about a
401k.
The part I considered relevant was where Howard talks about the high cost of
commissions; the fees to get out of an annuity; and how the "guarantee" is
not so at all. He warns "people - older folks especially" about this, which
to me means younger folks should pay attention, too.
And any guru would know that saying "never" is crazy talk.
Do you sell or broker or otherwise stand to profit from promoting annuities?

I think it's important to provide such disclosures. I see fool.com is now in
the habit of regularly doing so, for one.

I am a DIYer and do not receive any financial or other material compensation
for the financial advice I give.
I have a client wrapping
up many years of participation (these plans date to the early 1960s) and
it would have been nuts to avoid contributing to the plan just because
VAs were all that was available.
I indicated that it was not something I would outright reject for a 401(k)
plan, mentioning that of course the matching must play a role in the
calculations, yada.

Howard's commentary is, to me, impetus for investigating further what sort
of annuity the OP's 401(k) plan offers.
 
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E

Elle

Tad Borek said:
Oh, not at all, I just didn't think you'd bestow guru status on a
TV/radio personality. Not to demonize them or anything, but
unfortunately the medium lends itself to sound bites,
Readers choose to attempt to transmit information via sound bites, as you
mistakedly do below.

There's no lending itself to anything; there are lazy people.
stuff you couldn't
get away with if you're actually paid for advice. This is a good example
really..."never buy annuities!"...when the issues are of course more
complicated than just that.
Keep reading at least to the first sentence of the piece I posted. Howard
specifically says to never buy _variable_ annuities.

If one searchs his site (instead of chooses to not read and learn), then one
will see he notes in 2004 that "The Securities & Exchange Commission just
released a report blasting the sale of variable annuities... Although the
SEC claims that variable annuities are suitable for some people, Clark sees
no good reason for anyone to get a type of annuity like this." Howard admits
that some people think variable annuities are suitable for some people.

You are also neglecting the likelihood that there are far more variable
annuity scams than otherwise. Howard AFAIC is trying to get people's
attention, and rightly so from what I've seen. Many media reports agree with
him or at least emphasize extreme caution. Do I really need to provide a
list of citations? Or can _you_ google? 'Cause googling shows, among other
things, that the SEC issued a warning on variable annuities in 2000 as well
as 2004. For example: "The SEC said most investors should avoid purchasing
a variable annuity for an IRA, 401(k) or other tax-qualified retirement
plan, and instead make the maximum contributions to those plans before
considering an annuity."

Do you feel the SEC was wrong to issue such strong warnings?

The mere fact that you admit they are "complicated" vehicles tells me they
are extremely prone to being sold by hucksters to very innocent and naive
people, at significant profit to the hucksters and loss to the people.

You want to quibble over "never"? Fine. Howard's counsel better reflects the
consensus opinion (assuming impartial people are queried) than yours does.
Sure it's important, and if I sold annuities I'd say that...but I don't.
And? There's more to the question, Tad. I do a disservice to the newsgroup
by not asking for a complete answer to this question you agree is important.
You do a disservice to the group by making people have to extract a complete
answer from you.
 

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