Variable annuity trading costs?

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ookluh
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Variable annuity trading costs?

Post by ookluh » Sat Nov 18, 2017 4:55 pm

Hi all,

When providing some counter points to why I would want out of a variable annuity recently, I mentioned the concept of "hidden costs" in underlying funds due to trading costs, which as I understand it are not accounted for anywhere else - including expense ratios, mortality and expense charges, administrative fees, etc. The NWM person we work with claims that there are no underlying trading costs because these are "absorbed" by NWM (or somehow already accounted for in the fees). I am very skeptical that this is the case - and in the end it's not going to affect my decision one way or the other, as we have IRAs in a variable annuity contract and have realized that this makes little to no sense - but am just curious if this is actually true.. mostly for my own edification and understanding on the subject matter.

itstoomuch
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Re: Variable annuity trading costs?

Post by itstoomuch » Sat Nov 18, 2017 5:08 pm

Tis true for our dVA. Very little reason to "trade" funds. Our dVA do discourage "excessive" trading as do most IRA allocated funds, discourage trading within their family. Vanguard and Fidelity will discourage trading.

Individual funds in our annuity have their own fees which are pretty small compared to their retail versions. You may see a slightly higher annual fee for the more exotic funds and may amount to a inconsequential amount.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

ookluh
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Re: Variable annuity trading costs?

Post by ookluh » Sat Nov 18, 2017 5:17 pm

itstoomuch wrote:
Sat Nov 18, 2017 5:08 pm
Tis true for our dVA. Very little reason to "trade" funds. Our dVA do discourage "excessive" trading as do all most IRA allocated funds, discourage trading within the family. Vanguard and Fidelity will discourage trading.

Individual funds in the annuity have their own fees which are pretty small compared to their retail versions. You may see a slightly higher annual fee for the more exotic funds and may amount to a inconsequential amount.
Thank you for the reply. I'm not sure if that's exactly what I was referring to - I think you might mean if we are switching between funds within the VA, whereas I am referring to the costs of trading individual equities within each fund by fund managers, which I don't believe is included in the expense ratio or anywhere else..?

itstoomuch
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Re: Variable annuity trading costs?

Post by itstoomuch » Sat Nov 18, 2017 5:20 pm

I am not aware that you can trade individual equities within an MF selection in an VA.
I don't own any NWM so I can not say that every dVA has specific rules. I have a problem with mutual insurance/annuity companies.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

ookluh
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Re: Variable annuity trading costs?

Post by ookluh » Sat Nov 18, 2017 5:26 pm

itstoomuch wrote:
Sat Nov 18, 2017 5:20 pm
I am not aware that you can trade individual equities within an MF selection in an VA.
I don't own any NWM so I can not say that every dVA has specific rules. I have a problem with mutual insurance/annuity companies.
Ah I see what you mean.. When you said "our" I thought you meant you were a rep at NWM... obviously that is not the case! I didn't mean me specifically choosing and trading equities, just the higher costs that come with turnover/churning/whatever you want to call it.

I am in the process of moving most of our investments out - wouldn't say I have a problem persay, but certainly don't think it's the best way for us to invest now that I've been learning more and more!

itstoomuch
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Re: Variable annuity trading costs?

Post by itstoomuch » Sat Nov 18, 2017 5:28 pm

Sidebar:
I find your question kinda fascinating in an odd way.
The most basic question that BH has with Indexes, asset allocation of available Indexes is, "What is the Market risk of the Index(s)?"
The most basic question for annuities is, "What are the fees within the annuity?"

What people need to recognize is that in a self-directed Index/MF portfolio, It is YOU who bare the Market Risk. Hence it is an Investment
While in an Annuity, the Annuity Company has assumed some of your Market Risk for a fee. It is Insurance on your retirement income. Hence annuities are Insurance products.
YMMV :twisted:
Last edited by itstoomuch on Sat Nov 18, 2017 5:33 pm, edited 1 time in total.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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friar1610
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Re: Variable annuity trading costs?

Post by friar1610 » Sat Nov 18, 2017 5:30 pm

I would think the "funds" within a VA would have roughly the same trading costs as the mutual funds they clone. And, my understanding is that in mutual funds those costs are not included in the ER so I would think the same would be true for VA portfolios. Of course by using index portfolios within a VA those costs would be minimized as they are with index MFs.
Friar1610

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Re: Variable annuity trading costs?

Post by itstoomuch » Sat Nov 18, 2017 5:36 pm

ER's reduce the yield of the fund. You don't directly see the ER whether within or without an annuity.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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friar1610
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Re: Variable annuity trading costs?

Post by friar1610 » Sat Nov 18, 2017 5:40 pm

itstoomuch wrote:
Sat Nov 18, 2017 5:36 pm
ER's reduce the yield of the fund. You don't directly see the ER whether within or without an annuity.
Yeah, you do see the ERs - they're in the prospectus for every mutual fund and VA portfolio. What you don't see are the trading costs for the stocks/bonds within the MFs/VA portfolios. Both reduce earnings.
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BL
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Re: Variable annuity trading costs?

Post by BL » Sat Nov 18, 2017 5:43 pm

Yes, AFAIK, there are trading costs within funds that don't show up as direct costs. My understanding is that looking at the % of turnover could be a reasonable guess as to the costs of that. Active funds usually have a greater turnover than index funds, so the trading costs would be greater.

itstoomuch
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Re: Variable annuity trading costs?

Post by itstoomuch » Sat Nov 18, 2017 5:43 pm

^ friar1610 has provided a more correct answer.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

ookluh
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Re: Variable annuity trading costs?

Post by ookluh » Sat Nov 18, 2017 7:17 pm

Thanks everyone for the replies - I suspect that there is nothing different about VAs that would mean that trading costs are absorbed by the company. For anyone reading this thread that isn't aware about the trading costs I'm talking about, here is a link to an outside article just for a brief bit of info:

https://www.wsj.com/articles/SB10001424 ... 0954870722

The implication that the agent made was that trading costs did not impact the bottom line for the investor, but I suspect more that they are just not even aware of the expenses themselves rather than the insurance company decided to do us a solid and lower our costs behind the scenes.
Last edited by ookluh on Sat Nov 18, 2017 7:27 pm, edited 2 times in total.

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Mel Lindauer
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Re: Variable annuity trading costs?

Post by Mel Lindauer » Sat Nov 18, 2017 7:24 pm

ookluh wrote:
Sat Nov 18, 2017 7:17 pm
Thanks everyone for the replies - I suspect that there is nothing different about VAs that would mean that trading costs are absorbed by the company. For anyone reading this thread that isn't aware about the trading costs I'm talking about, here is a link to an outside article just for a brief bit of info:

https://www.wsj.com/articles/SB10001424 ... 0954870722

The implication that the agent made was that trading costs did not impact the bottom line for the investor, but I suspect more that they are just not even aware of the expenses themselves rather than the insurance company decided to do us a solid and lower our costs behind the scenes.
Your agent obviously doesn't know what he/she's talking about, but that's not surprising. Many (most?) annuity sales folks only know what they were taught by the insurance company and lots of them don't even understand that.
Best Regards - Mel | | Semper Fi

ookluh
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Re: Variable annuity trading costs?

Post by ookluh » Sat Nov 18, 2017 7:32 pm

Mel Lindauer wrote:
Sat Nov 18, 2017 7:24 pm
ookluh wrote:
Sat Nov 18, 2017 7:17 pm
Thanks everyone for the replies - I suspect that there is nothing different about VAs that would mean that trading costs are absorbed by the company. For anyone reading this thread that isn't aware about the trading costs I'm talking about, here is a link to an outside article just for a brief bit of info:

https://www.wsj.com/articles/SB10001424 ... 0954870722

The implication that the agent made was that trading costs did not impact the bottom line for the investor, but I suspect more that they are just not even aware of the expenses themselves rather than the insurance company decided to do us a solid and lower our costs behind the scenes.
Your agent obviously doesn't know what he/she's talking about, but that's not surprising. Many (most?) annuity sales folks only know what they were taught by the insurance company and lots of them don't even understand that.
Mel, thanks for the response in clarification - it's good hearing a confirmation about what I suspected.

Even if a company wanted to (which I'm not sure why they would, considering many investors aren't aware of these costs), I'm not even sure how practical that would even be since the "hidden costs" of trading include the bid-ask spreads and brokerage commissions. I would be surprised if anyone was even tracking these at all, let alone for the sole purpose of reimbursing others for this later.

Nate79
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Re: Variable annuity trading costs?

Post by Nate79 » Sat Nov 18, 2017 8:16 pm

Sorry to hear you are working with one of the worst, most expensive companies out there. Go big or go home I guess.

ookluh
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Re: Variable annuity trading costs?

Post by ookluh » Sat Nov 18, 2017 8:53 pm

Nate79 wrote:
Sat Nov 18, 2017 8:16 pm
Sorry to hear you are working with one of the worst, most expensive companies out there. Go big or go home I guess.
Learning this slowly and the difficult way, but working on getting out of the VA soon, and others to follow once I've held taxable assets long enough to get long-term capital gains tax.

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Re: Variable annuity trading costs?

Post by grabiner » Sat Nov 18, 2017 8:59 pm

itstoomuch wrote:
Sat Nov 18, 2017 5:28 pm
Sidebar:
I find your question kinda fascinating in an odd way.
The most basic question that BH has with Indexes, asset allocation of available Indexes is, "What is the Market risk of the Index(s)?"
The most basic question for annuities is, "What are the fees within the annuity?"

What people need to recognize is that in a self-directed Index/MF portfolio, It is YOU who bare the Market Risk. Hence it is an Investment
While in an Annuity, the Annuity Company has assumed some of your Market Risk for a fee. It is Insurance on your retirement income. Hence annuities are Insurance products.
This is not the case with a variable annuity. Variable annuities allow you to invest in different portfolios, and earn the investment return less expenses, all within an annuity wrapper. The wrapper is important for tax issues; you do not pay any tax on your variable annuity when your stocks or bonds pay dividends, or when you switch funds. But a variable annuity does not really become an annuity unless you choose to annuitize it; you can also use your non-annuity assets to buy an annuity later.

A fixed annuity is an insurance product; it provides insurance against outliving your portfolio. (And some variable annuities do provide guaranteed minimum withdrawal benefits, which is also an insurance product, but then you should look at the price of that insurance; it tends to be very expensive.)
David Grabiner

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Re: Variable annuity trading costs?

Post by FRIZ100 » Thu Nov 23, 2017 1:24 pm

grabiner wrote:
Sat Nov 18, 2017 8:59 pm
itstoomuch wrote:
Sat Nov 18, 2017 5:28 pm

This is not the case with a variable annuity. Variable annuities allow you to invest in different portfolios, and earn the investment return less expenses, all within an annuity wrapper. The wrapper is important for tax issues; you do not pay any tax on your variable annuity when your stocks or bonds pay dividends, or when you switch funds. But a variable annuity does not really become an annuity unless you choose to annuitize it; you can also use your non-annuity assets to buy an annuity later.
Variable Annuities that are still in the accumulation phase can have an insurance element to them that shifts some of the Investment risk to the Insurance company. My mom has (2) variable annuities from Jackson ( haven't been annuitized ) that have what is call AutoGuard 5 premium paid since inception which provides a Guaranteed Minimum Withdrawal Balance w/ potential for step-up that is evaluated annually on the contract date.

Mom is 73 and it allows for her to stay invested in a much more aggressive stock portfolio than if she were in an tIRA whereby 100% of the investment risk would be hers.

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