Exiting a variable annuity

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Frank Grimes
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Exiting a variable annuity

Post by Frank Grimes » Thu May 24, 2018 9:10 am

A year and a half ago (unfortunately a few months before I found this site), my spouse and I were sold variable annuities in our Roth accounts. They’re not substantial parts of our overall portfolio size (a bit less than 10%) but it irritates me that we bought into this kind of thing.

We are in a 5% surrender fee period, and will be in that window for another year and a half before it goes down to 4% and will have to pay some level of surrender fee until the current contract is up in 3.5 more years (December 2021). Per the prospectus, the fees are 1.25%, plus another 0.6% or so for the underlying index investment, tied to MSCI EAFE. And that’s just what I can easily glean, as these things are kept purposefully dense to lose or bore investors from reading further.

Question 1: Any reason we should stay with this until the surrender fee period is up? I think I want out now. The product offers downside protection which absorbs your losses in case of a decline in the index of less than 10% after the 5 year period (which is how they sell it to you). Barring a hefty decline in the index, it’s hard to see a situation where this outperforms a simple international index fund in a Roth over 3 years using back-of-the-napkin math in Excel, even including the 5% initial haircut, because of the exorbitant fees shown above. Knowing what I know now I’d prefer to manage our portfolio risk through asset allocation rather than through nebulous guarantees of principal preservation. And as we're in our early 30s, this is our accumulation period so I think it's a bit premature for a super defensive product like this.

Question 2: Anyone done this before? I assume that because these are in Roth accounts, we can roll the cash value into our existing Roth IRAs without complications. Any steps I should consider to make sure this is a clean rollover? Our Roth IRAs are with Wells Fargo and Merrill Lynch, if that matters.

Thanks for reading and let me know if I left out any pertinent information.

DarkHelmetII
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Re: Exiting a variable annuity

Post by DarkHelmetII » Thu May 24, 2018 9:47 am

Frank - by the way, love the user name (assuming Simpsons reference). Now to your question, my input below:

1) Based on the high fees (1.85% per year) where as you'd likely otherwise be in the neighborhood of 0.05% - 0.20% in Vanguard or similar, I'd say the math is pretty straight-forward that you just cough up the surrender fee.

2) A variable annuity inside of a Roth IRA, particularly at your young age, sounds pretty shady. Meaning that, in my opinion, whoever sold you this a) was oblivious to the fact that this didn't make a lot of sense, or b) intentionally sold you something that really didn't make sense. I'd put pressure on the carrier to waive the surrender fees otherwise you are going to CFPB and / or Insurance Commissioner. Not even sure this would pass the suitability test.

3) If you can't get investment options in the neighborhood of the indicated expense ratios per #1 within Merrill and Wells, on a separate note I'd move the Roth (assuming you mean Roth IRA).


Silver lining in all this is that 5% surrender fee isn't THAT bad AND as you pointed out less than 10% of overall holdings. Also please give consideration to other poster's points as this is just my unofficial advice!

Frank Grimes
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Re: Exiting a variable annuity

Post by Frank Grimes » Thu May 24, 2018 9:59 am

Thanks for the response. Yeah I'll flip the cash value into either VTI or VXUS (Vanguard total US stock market ETF or international stock market ETF) in those Roth IRA accounts, in accordance with our allocation targets.

KSActuary
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Re: Exiting a variable annuity

Post by KSActuary » Thu May 24, 2018 10:14 am

Get a good securities attorney to write a letter to the compliance officer of the offending broker requesting that you receive your total premium back. A VA sold into a Roth IRA is a new one to me and the suitability requirement would really be questionable.

Frank Grimes
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Re: Exiting a variable annuity

Post by Frank Grimes » Thu May 24, 2018 11:11 am

Probably not going to go that route - aside from whether such a claim is valid or not and opening that can of worms, I think we'd spend more on an attorney than we stand to lose in the surrender fee.

I'm sure they'd be able to point to items in investment questionnaires we filled out in order to argue the suitability, so seems like a long shot.

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Dale_G
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Re: Exiting a variable annuity

Post by Dale_G » Thu May 24, 2018 12:21 pm

I agree Frank, bite the bullet. Lesson learned, get on with life.

Dale
Volatility is my friend

Frank Grimes
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Re: Exiting a variable annuity

Post by Frank Grimes » Thu May 24, 2018 2:28 pm

Bullet bitten - I have sent in my paperwork to do the transfer of my annuity. At least I'm getting out more than I put in a year and a half ago, so I didn't lose money.

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sergeant
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Re: Exiting a variable annuity

Post by sergeant » Thu May 24, 2018 3:42 pm

Frank Grimes wrote:
Thu May 24, 2018 2:28 pm
Bullet bitten - I have sent in my paperwork to do the transfer of my annuity. At least I'm getting out more than I put in a year and a half ago, so I didn't lose money.
I doubt it. Show your numbers AFTER you (or IRA provider) receive the check.
Lincoln 3 EOW!

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Dale_G
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Re: Exiting a variable annuity

Post by Dale_G » Thu May 24, 2018 11:35 pm

sergeant wrote:
Thu May 24, 2018 3:42 pm
I doubt it. Show your numbers AFTER you (or IRA provider) receive the check.
Since this is a variable annuity purchased 1-1/2 years ago, it could well have appreciated more than the 5% exit fee.

Dale+-
Volatility is my friend

Frank Grimes
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Re: Exiting a variable annuity

Post by Frank Grimes » Fri May 25, 2018 8:14 am

It did - it was tied to the MSCI EAFE international index which fortunately had like a 25% return over that period. So I'll clear a couple K even after the surrender fee. Which is way worse than if I just invested in VXUS from the outset, but hey that's life.

deltaneutral83
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Re: Exiting a variable annuity

Post by deltaneutral83 » Fri May 25, 2018 8:42 am

To my knowledge one of the few benefits of a VA is the tax free nature of the growth, which a Roth already provides. I can't understand someone who isn't well past the estate exemption using a VA correctly? It almost seems like it should be unlawful for VA's to be sold inside of retirement accounts? Where would a VA inside of such be a decent idea? The so called floor that VAs guarantee isn't really that much of a benefit when you think about the fees that you have to pay for that. I think we've seen one or two ten year periods where the gains on the market were nominally zero. And you have to pay incredible fees to get that "protection" and hope the company stays solvent (AIG?).

focusedonwhatmatters
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Re: Exiting a variable annuity

Post by focusedonwhatmatters » Fri May 25, 2018 11:52 am

deleted.
Last edited by focusedonwhatmatters on Fri Jul 20, 2018 10:38 am, edited 1 time in total.

KSActuary
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Re: Exiting a variable annuity

Post by KSActuary » Sat May 26, 2018 1:50 am

Would need more details regarding the purchaser and the circumstances to say anything. Paying a securities attorney $500 to send a letter is a small cost to find out.

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