Mel's Forbes Series on Annuities - Part 3 of 6

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Mel's Forbes Series on Annuities - Part 3 of 6

Post by Mel Lindauer »

Here's the third Forbes column in my six-part series on annutiies. This one is titled" Variable Annuities Don't Belong In Retirement Plans" and you can find it here:

http://www.forbes.com/2010/07/02/variab ... dauer.html

I'll probably get a lot of flack from the insurance industry types about this one.
Best Regards - Mel | | Semper Fi
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Post by ddb »

Nice article, Mel. The article does a great job in pointing out that no investor should be "forced" into an annuity, for example in the case of a 401k funded with a variable annuity contract.

Unfortunately, the article barely touches on the primary distribution of deferred variable annuities inside of IRA accounts today, which is that investors are sold these products based on income guarantees. How should an investor decide if the guarantees are 1) useful, and 2) if so, worth the costs.

I'm sure we all get invitations from local financial salespeople to free-dinner seminars where this concept will be pitched. This is how these products are primarily marketed and distributed today, and where a lot of the damage is being done. Although I have illustrated on this form several times before that these products may be suitable for a small percentage of investors (even inside of IRA or other qualified plans), this is unfortunately not the case for most of the sales that are happening.

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
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Post by Mel Lindauer »

ddb wrote:Nice article, Mel. The article does a great job in pointing out that no investor should be "forced" into an annuity, for example in the case of a 401k funded with a variable annuity contract.

Unfortunately, the article barely touches on the primary distribution of deferred variable annuities inside of IRA accounts today, which is that investors are sold these products based on income guarantees. How should an investor decide if the guarantees are 1) useful, and 2) if so, worth the costs.

I'm sure we all get invitations from local financial salespeople to free-dinner seminars where this concept will be pitched. This is how these products are primarily marketed and distributed today, and where a lot of the damage is being done. Although I have illustrated on this form several times before that these products may be suitable for a small percentage of investors (even inside of IRA or other qualified plans), this is unfortunately not the case for most of the sales that are happening.

- DDB
Truth be told, ddb, most investors probably don't have a clue that they're buying insurance as part of their retirement plan. And if they did, the majority of them would probably decline. However, when the annuity is the only option available in one's 401k or 403b plan, the investor doesn't have the option to say "No thanks" to the basic insurance package.

The investor who just graduated from college and has just started his/her first "real" and has to choose retirement plan options doesn't have a clue that they're buying insurance. And if that option was explained to them, most of them would likely decline.

IMO, this is an injustice that needs to be rectified.
Best Regards - Mel | | Semper Fi
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Post by ddb »

Mel Lindauer wrote:Truth be told, ddb, most investors probably don't have a clue that they're buying insurance as part of their retirement plan. And if they did, the majority of them would probably decline. However, when the annuity is the only option available in one's 401k or 403b plan, the investor doesn't have the option to say "No thanks" to the basic insurance package.

The investor who just graduated from college and has just started his/her first "real" and has to choose retirement plan options doesn't have a clue that they're buying insurance. And if that option was explained to them, most of them would likely decline.

IMO, this is an injustice that needs to be rectified.
I hear you, and there's no question that an annuity-only employer plan is a poor plan for the participants. On the other hand, we as citizens/investors/employees/whatever don't have the RIGHT to a certain type of investment plan. They are called employee "benefits" for a reason.

I continue to support the elimination of defined contribution plans in favor of expanded IRA contribution limits. This is a way to solve the problem by having LESS legislation rather than more. Employers can still offer matching-type programs through Profit Sharing plans or Money Purchase Plans, etc, if they so desire.

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
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Post by Mel Lindauer »

ddb wrote:
Mel Lindauer wrote:Truth be told, ddb, most investors probably don't have a clue that they're buying insurance as part of their retirement plan. And if they did, the majority of them would probably decline. However, when the annuity is the only option available in one's 401k or 403b plan, the investor doesn't have the option to say "No thanks" to the basic insurance package.

The investor who just graduated from college and has just started his/her first "real" and has to choose retirement plan options doesn't have a clue that they're buying insurance. And if that option was explained to them, most of them would likely decline.

IMO, this is an injustice that needs to be rectified.
I hear you, and there's no question that an annuity-only employer plan is a poor plan for the participants. On the other hand, we as citizens/investors/employees/whatever don't have the RIGHT to a certain type of investment plan. They are called employee "benefits" for a reason.

I continue to support the elimination of defined contribution plans in favor of expanded IRA contribution limits. This is a way to solve the problem by having LESS legislation rather than more. Employers can still offer matching-type programs through Profit Sharing plans or Money Purchase Plans, etc, if they so desire.

- DDB
I agree that expansion of the contribution limits for IRAs would be a good solution to the problem, especially if investors continued to get any company match via another format.
Best Regards - Mel | | Semper Fi
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Post by ddb »

Mel Lindauer wrote:I agree that expansion of the contribution limits for IRAs would be a good solution to the problem, especially if investors continued to get any company match via another format.
I've always been amused by the irony of employers who offer lousy high-cost plans, but then add some sort of matching component. "We're too cheap to give you a good plan, but we'll give you a match." Why not just offer the best available plan and reduce the match accordingly?

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
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TIAA-CREF

Post by 555 »

I see you mentioned TIAA-CREF a couple of times in the series of 6, but I'd like to know more about their specific situation.

What is the practical difference between a CREF "Variable Annuity" (while accumulating) and a mutual fund?

For those of us with our main retirement holdings at TIAA-CREF, what are the things to consider, when reaching retirement, as far as choosing to annutitize some or all of our accumulations with T-C?

Would I be wrong to just dismiss the idea, given that I could just roll over to an IRA? (I don't have any pension, nor SS, but I don't feel I have to have an income stream.)

I'm sure there are many factors to consider. Has something already been written on this? Or will it appear in the series?

--------------------------------------------------------------------

It is good to publicize how terrible many annuities are, and to lobby against bad (and for good) reforms about this. My employer has responded to a general move against annuties by eliminating them in their 401a plan. This is good for those employees who went with ING, VALIC, and Met-Life, but it is bad for those of us who are with TIAA-CREF because we have lost access to the low expense CREF "variable annuities" (which are really mutual funds, right?) and now we must use TIAA-CREF's more expensive mutual funds and the even more expensive mutual funds of third parties with TIAA-CREF just acting as administrator instead of fund manager.
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Post by exrvi »

I've been following the Treasury/Labor initiative regarding annuities in 401Ks and even been to the web site and read some of the 700 responses they got to their 30 plus question inquiry.

My impression is that if an annuity were to become a mandatory offering, it would not be a VA as we know them, but more akin to a fixed annuity. In essence, you would be buying "credits" that you would use once you retire. This plan would prohibit loans, withdrawals, etc prior to retirement. Why, it would be very similar to Social Security! The key reason for considering an annuity approach is to help deal with sequence of return and investment risk, which a standard VA without expensive living benefit riders doesn't do.

--Economic policy remarks deleted--
Fantasy? I certainly hope so.

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Post by sschullo »

ddb wrote:
Mel Lindauer wrote:I agree that expansion of the contribution limits for IRAs would be a good solution to the problem, especially if investors continued to get any company match via another format.
I've always been amused by the irony of employers who offer lousy high-cost plans, but then add some sort of matching component. "We're too cheap to give you a good plan, but we'll give you a match." Why not just offer the best available plan and reduce the match accordingly?

- DDB
In k12 school districts, we get hammered at both ends. The plan is lousy and there has never been a match. Furthermore, after all of the publcity of how bad these plans are, there is no plan to change anything. The unions too are virtually useless.
I have come to the conclusion, so far that the culture of education and annuities seem to be the perfect match. Educators lose no principal, no investment in greedy capitalism, and TSA sales people know how to talk to teachers about the privious two with great success, year after year, decade after decade. People that go into teaching generally do not have to think about the economy, finances or money. Everything is taken care of from salay to pension, from one institution to another. Its really been great for somebody like me who has learned and takened advantaged of the private sector investing, then I get the best of 3 worlds.
Steve
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Post by sschullo »

sschullo wrote:
ddb wrote:
Mel Lindauer wrote:I agree that expansion of the contribution limits for IRAs would be a good solution to the problem, especially if investors continued to get any company match via another format.
I've always been amused by the irony of employers who offer lousy high-cost plans, but then add some sort of matching component. "We're too cheap to give you a good plan, but we'll give you a match." Why not just offer the best available plan and reduce the match accordingly?

- DDB
In k12 school districts, we get hammered at both ends. The plan is lousy and there has never been a match. Furthermore, after all of the publicity of how bad these plans are, there is no plan to change anything. The unions too are virtually useless.
I have come to the conclusion, so far that the culture of education and annuities seem to be the perfect match. Educators lose no principal, no investment in greedy capitalism, and TSA sales people know how to talk to teachers about the previous two with great success, year after year, decade after decade. People that go into teaching generally do not have to think about the economy, finances or money. Everything is taken care of from salary to pension, from one institution to another. Its really been great for somebody like me who has learned and taken advantaged of the private sector investing, then I get the best of 3 worlds.

Steve
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
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Re: Mel's Forbes Series on Annuities - Part 3 of 6

Post by kenbrumy »

Mel Lindauer wrote:I'll probably get a lot of flack from the insurance industry types about this one.
So far, I think there's a good chance you'll be assassinated before Part 6 runs. Good work!

You've reinforced my belief there isn't any reason for any annuity to go into a tax deferred account. That must be the reason our current administration wants to do it. Think of all the profits flowing into AIG and others. It would be like taxing all us "rich" investors to pay for their bailouts. Hopefully, this won't be edited out as a political comment but just a general comment on our misguided government regardless of party.

The details you bring up about the annuitization proposals got my blood up. I would definitely cancel my 401k contributions immediately. I would consider an immediate job change to let me get access to the account through a rollover. Fortunately, in my line of work changing employers is usually not an issue since their is no pension or meaningful benefits for company longevity.

Your story about how the insurance industry dominates teacher plans is right on. Texas has the same deal with the teachers' union getting nice contributions from the insurance companies and the individual teachers being held in bondage with high fee options.
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Post by Mel Lindauer »

ddb wrote:
Mel Lindauer wrote:I agree that expansion of the contribution limits for IRAs would be a good solution to the problem, especially if investors continued to get any company match via another format.
I've always been amused by the irony of employers who offer lousy high-cost plans, but then add some sort of matching component. "We're too cheap to give you a good plan, but we'll give you a match." Why not just offer the best available plan and reduce the match accordingly?

- DDB
It sure is contradictory, ddb. I do suspect that the prize goes to the salesperson who wined and dined, played golf with, and/or provided tickets to events for the decision maker and not to the company that offered the best package for the employees.

And, I'd be willing to bet that the vast majority of decision-makers don't have a clue about investing, and yet they're charged with deciding on a plan that will affect the lives of so many. It's really sad and something needs to be done about it. It's a shame everyone can't just sign up for the TSP as an option, or simply opt out of the company plan an be eligible for a much larger IRA contribution by doing so.
Best Regards - Mel | | Semper Fi
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Post by kenbrumy »

Mel Lindauer wrote: And, I'd be willing to bet that the vast majority of decision-makers don't have a clue about investing, and yet they're charged with deciding on a plan that will affect the lives of so many. It's really sad and something needs to be done about it. It's a shame everyone can't just sign up for the TSP as an option, or simply opt out of the company plan an be eligible for a much larger IRA contribution by doing so.
What I've seen is that the plans offered by the company is "free" to the company. They let a financial firm manage the plan. That financial firm puts together a series of funds that the company rep approves. Unfortunately, the approval of the load and high fee funds are necessary to keep the plan "free." The company makes contributions that are considered part of the compensation of the employees which helps in recruiting and retention.

A company that paid 1 to 2% to run a plan and lowered their contribution would look like they weren't paying enough of a match when compared to their competitors using the "free" plans.

Most employees are clueless about the fees involved. At the company I'm at we had to agitate to get a no load index fund as an option but it still has a 0.35% fee associated with it. Hardly anyone I talk with has it. They pile into the load funds with 1.5% fees.

As for opting out of a company plan, that would cut the profits of the financial firms so generous to our lawmakers that keep that from being an option. Of course, that didn't keep them creating a plan for government employees with the lowest fees of any plan.
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Post by dkdoy »

Thanks Mel, this has been a very helpful discussion on annuities. I must admit my understanding of them has been very limited. As always, great job in presenting useful information.
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