Bonds in a taxable account - use a variable annuity

[ddb]

There is often talk here of how to best build fixed income positions when the bulk of investable assets are in a taxable account. Variable annuities have been presented as options before, but the costs of doing so are often high, and the investment options are often limited.

It appears that Jefferson National offers a variable annuity, the Monument Advisor, which carries an annual charge of $240 regardless of account size. There is not additional insurance charge beyond that. They have a wide array of fixed income subaccount options, including:

Vanguard Short-Term Investment Grade (0.15% ER)
Vanguard Total Bond Market (0.16% ER)
PIMCO Long-Term US Gov't (0.64% ER)
PIMCO Real Return (0.71% ER)

For those seeking commodity exposure in a taxable account, the PIMCO Commodity Real Return Fund is also available (1.06% ER).

So, let's say you have $200K of taxable money to be devoted to bonds, and want 50/50 short-term bonds and TIPS. You can buy PIMCO Real Return with $100K and Vanguard Short-Term Inv Grade with $100K for a blended expense ratio of 0.55%, including the $240 annual annuity fee. I believe the Vanguard subaccounts also carry transaction fees of $20 per purchase.

This isn't a no-brainer, because you still have much higher expenses than outside of the annuity, where you could assemble the same bond allocation for next to nothing (0.11% ER for short-term bond ETF, 0% ER for individual TIPS). Plus, you have the tax treatment of a deferred annuity, which is LIFO and any gains distributed prior to 59.5 subject to 10% penalty. Still, for somebody in a high tax bracket with little or no room in a tax-deferred account, this COULD be a viable option for part of the fixed income allocation.

- DDB

EDIT to add: I have no affiliation with this company or product, and no experience dealing with this company or product. I make no recommendation as to the suitability of this product for any particular investor, and I make no statement about the company in general.

[HueyLD]

ddb,

Looks like a decent option for those with no tax deferred space and in high tax bracket. Is there a way to get a prospectus without having to give out your personal info?

Thanks for the info.

[ddb]

ddb,

Looks like a decent option for those with no tax deferred space and in high tax bracket. Is there a way to get a prospectus without having to give out your personal info?

Thanks for the info.

Monument Advisor Prospectus

- DDB

[Chuck]

I saw this before, when I was looking for VA info and I was wondering if it was legit. This would be a no-brainer for rolling over my current VA. But I know nothing of the company and their prospects...

[ddb]

I saw this before, when I was looking for VA info and I was wondering if it was legit. This would be a no-brainer for rolling over my current VA. But I know nothing of the company and their prospects...

Company-quality shouldn't matter too much. There's no surrender charges, and the assets are held in the subaccounts (not a general asset of the insurance company). There are no guarantees on the contract. Worst-case scenario, if company ever folds you could just move it elsewhere. I don't know what sort of language is in the prospectus providing for the potential for future fee increases, if any. Again, though, could always just move the money.

- DDB

[Chuck]

They charge a $50 transaction fee to buy or sell Vanguard funds, among others. (The transaction fee goes down to $20 for 31+ transactions.)

Probably still not a bad deal still compared to other VA's.

[ddb]

They charge a $50 transaction fee to buy or sell Vanguard funds, among others. (The transaction fee goes down to $20 for 31+ transactions.)

Probably still not a bad deal still compared to other VA's.

Oh, okay, I thought the fee was $20, but I must have mis-read the terms. That's kind of steep, but if you can purchase one or two funds and hold for many years, could still work.

[HueyLD]

I've read the sections of the prospectus that are of interest to me. This new "cafeteria" approach seems to be fair to those who just want to "set it and forget it." In other words, it is not for traders because the transaction fees will cost them plenty.

It is interesting to observe that most funds hit with transaction fees are VG funds. It must be VG's refusal to share their razor-thin profit margins with the insurance company.

Also, the price for GMDB is between 0.35% and 0.50%. It is nice to know that someone has explicitly price the cost of GMDB.

[LFT_PFT]

What is GMDB?

[ddb]

What is GMDB?

Probably Guaranteed Minimum Death Benefit.

- DDB

[Dale_G]

Well, I am glad to see another company offer a VA with somewhat reasonable fees - and it is refreshing to see a prospectus that is only 76 pages.

The Monument Advisor offers a truck load of funds, and if you need room for TIPS it may be worthwhile, but look carefully before you jump.

The Monument VA looks cheap for a 200K contract if you do not require a guaranteed minimum death benefit (GMDB = to the sum of all of your contributions). Excluding the underlying fund fees the cost for a 200K contract is $240. If you add the GMDB the cost becomes $940 for a total cost (less fund expense ratios) of 0.47%.

If you don't need the TIPS fund, and are willing to settle for Vanguard's offerings, go to Vanguard for a better deal.

Again, neglecting the underlying fund fees, Vanguard charges .295% for the basic VA ($590 for 200k). Adding the GMDB cost 0.05% for a total of $600. It looks like Vanguard is $340 cheaper with the GMDB. In addition, for an additional 0.12%, Vanguard offers an annual step up. In other words the GMDB is adjusted to the highest value obtained on any contract anniversary date.

Young pups may not be interested in guaranteed return of contributions, because over the long term a VA should be held, it is likely that the value of the contract will far exceed the contributions. As a "mature guy" however, I find the stepped up GMDB to be attractive.

I didn't read the entire prospectus or the Statement of Additional Information, but I remain uncertain about the underlying expense ratios of the funds. It appears that most (or all) of the funds are Variable Annuity sub-accounts. I have to wonder if the expense ratios are really the expense ratios of the real underlying funds or whether they include the mortality and expense fees of the sub accounts.

I have a couple of Vanguard VAs in this asset range, I see no need to move.

Dale

[ddb]

Well, I am glad to see another company offer a VA with somewhat reasonable fees - and it is refreshing to see a prospectus that is only 76 pages.

The Monument Advisor offers a truck load of funds, and if you need room for TIPS it may be worthwhile, but look carefully before you jump.

The Monument VA looks cheap for a 200K contract if you do not require a guaranteed minimum death benefit (GMDB = to the sum of all of your contributions). Excluding the underlying fund fees the cost for a 200K contract is $240. If you add the GMDB the cost becomes $940 for a total cost (less fund expense ratios) of 0.47%.

If you don't need the TIPS fund, and are willing to settle for Vanguard's offerings, go to Vanguard for a better deal.

Again, neglecting the underlying fund fees, Vanguard charges .295% for the basic VA ($590 for 200k). Adding the GMDB cost 0.05% for a total of $600. It looks like Vanguard is $340 cheaper with the GMDB. In addition, for an additional 0.12%, Vanguard offers an annual step up. In other words the GMDB is adjusted to the highest value obtained on any contract anniversary date.

Young pups may not be interested in guaranteed return of contributions, because over the long term a VA should be held, it is likely that the value of the contract will far exceed the contributions. As a "mature guy" however, I find the stepped up GMDB to be attractive.

I didn't read the entire prospectus or the Statement of Additional Information, but I remain uncertain about the underlying expense ratios of the funds. It appears that most (or all) of the funds are Variable Annuity sub-accounts. I have to wonder if the expense ratios are really the expense ratios of the real underlying funds or whether they include the mortality and expense fees of the sub accounts.

I have a couple of Vanguard VAs in this asset range, I see no need to move.

The TIPS issue is a big issue for lots of people here, so the Vanguard VA doesn't work. Also, don't know why you're factoring in the death benefit charges, as a "VA as substitute for taxable account" strategy wouldn't require such a death benefit. So, even if you just want "regular" bonds, the Jefferson product is still cheaper than Vanguard above a certain dollar amount. Also, ALL investment options within any variable annuity are VA subaccounts, not regular open-end funds.

- DDB

[windfall900]

I saw this before, when I was looking for VA info and I was wondering if it was legit. This would be a no-brainer for rolling over my current VA. But I know nothing of the company and their prospects...

Company-quality shouldn't matter too much. There's no surrender charges, and the assets are held in the subaccounts (not a general asset of the insurance company). There are no guarantees on the contract. Worst-case scenario, if company ever folds you could just move it elsewhere. I don't know what sort of language is in the prospectus providing for the potential for future fee increases, if any. Again, though, could always just move the money.

- DDB

Can you clarify what it means that "assets are held in the subaccounts"? Does that mean that my money is held strictly with Vanguard if I open a Jefferson variable annuity invested in Vanguard High-Yield Corporate Bond? I'm strongly considering opening a Jefferson National variable annuity but want to understand the company risk first.

[pascalwager]

Jefferson has the entire lineup of DFA VA funds: LV, SV, ILV, IS, STFI, and Global Bond. If you have a few hundred thousand dollars in a VA, then a rollover could bring you down to single-digit basis points for fees. You'd certainly want to minimize rebalancing at $50 per trade. This merits further study.

[Socrativestor]

Jefferson has the entire lineup of DFA VA funds: LV, SV, ILV, IS, STFI, and Global Bond. If you have a few hundred thousand dollars in a VA, then a rollover could bring you down to single-digit basis points for fees. You'd certainly want to minimize rebalancing at $50 per trade. This merits further study.

The prospectus states that some funds can only be purchased if the contract owner is working with an adviser approved by the fund. Although no fund is mentioned by name, that sounds like DFA to me. Can anyone confirm that DFA funds are open to all owners, even those without approved advisers?

I have a VVA that currently holds REITs and ST investment grade. Transitioning to JefNat would cut my fees by a few hundred dollars -- which is attractive but not compelling to me, especially given the (perhaps only "apparent") risk of switching to a lesser-known company. However, if I could cut fees AND get access to DFA in the bargain, that might get me to pull the trigger.

Thanks.

[windfall900]

Transitioning to JefNat would cut my fees by a few hundred dollars -- which is attractive but not compelling to me, especially given the (perhaps only "apparent") risk of switching to a lesser-known company.

Why is this a risk given DDB's point above about company quality not mattering for variable annuities?

[Socrativestor]

Transitioning to JefNat would cut my fees by a few hundred dollars -- which is attractive but not compelling to me, especially given the (perhaps only "apparent") risk of switching to a lesser-known company.

Why is this a risk given DDB's point above about company quality not mattering for variable annuities?

I expressed myself inartfully. Sorry. I do not know of any specific risk with JefNat but in a Murphy's Law world I suppose I am willing to pay a little bit for a "brand name" and the (perhaps irrational) comfort that it brings me. Some piece of me thinks that there has to be SOME advantage in SOME situation to being with Vanguard -- and for a few hundred bucks I'm satisfied with that answer for me. Your situation (as I understand it) is clearly different.

OTOH -- since I came across this thread I've been doing some digging online. Partly out of curiosity, etc. And I think I am becoming persuaded that switching might be a reasonable thing to do. The bigger problem is how to invest the VA. I'm currently roughly 50% REIT and 50% ST IG Bond. I am loathe to "chase yield", extend duration, etc. And yet earning sub 1% (which might just break 1% with the decrease in fees) on the ST IG is breaking my heart. In the high-yield argument between Rick and Larry, I've traditionally come down on Larry's side (i.e. no high yield), but the current landscape certainly making VG HY tempting. And then I see the past run-up and think about a possible coming fall and ...

The best I think I can do is try to find ways to shift the rest of my portfolio to get as much fixed income through TIAA Traditional @ 3%, which might even mean that some portion of my VA gets allocated to equity. In this case, gaining access to DFA would be attractive since I can't access it elsewhere. Even if I stayed with VVA equity sub-accounts, switching to JefNat still might make sense, I think.

Interested in hearing more from others.

Thanks.

[Socrativestor]

In my continuing research, I came across this page of JefNat publications (some of which can only be accessed by advisers): http://www.jeffnat.com//resources/publications.cfm

Of particular interest to the risk/safety issue:

"Monument Advisor: A Pure Separate Account Product"

Monument Advisor is different from many other variable annuities in a number of fundamental ways. Here’s one that’s particularly appealing: It’s a pure separate account product. This means investors who choose Monument Advisor aren’t exposed to Jefferson National’s credit risk during the period when the annuity is accumulating funds. To understand how this works, read through the simple explanation below. It explains more about separate accounts, insurance guarantees and how this benefit separates you and Monument Advisor from the pack.

If In understand this correctly, as long as you don't depend on one of the riders and also do not annuitize with JefNat, then you should be completely independent of JefNat's credit risk.

---

On a slightly related note, I also discovered that JefNat's financial strength rating had been downgraded in 2009 to B- from B (http://www3.ambest.com/Frames/Frameserver.asp?site=press&Tab=1&altsrc=2&RefNum=65494652774946546650).

In March 2012 JefNat's financial strength rating was upgraded from to B+ from B due in part to new capital from private equity firms and family offices (http://www3.ambest.com/frames/frameserver.asp?site=press&tab=1&altsrc=&altnum=&refnum=65494656774946546655). (I didn't look for the intermediate upgrade back to B from B-.)

It seems that now JefNat is owned to some degree by some of its customers (I presume) -- i.e. high-net worth individuals and families keeping alive a low-cost vehicle for their own tax-deferred investing. Makes me feel a little more secure. "Cooks eating their own cooking" and all that ...