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  1. Pat, Excellent post...KISS!!! Peace and Hope, Joel L. Frank
  2. Gary Turbak's answer applies with equal vigor to all monies withdrawn from tax-favored accounts. Every dollar going in is a dollar of gross income and every dollar withdrawn is also a dollar of gross income. Well, gross dollars are subject to ordinary income tax rates. Peace and Hope, Joel L. Frank
  3. I would like to adjust my reply. The term of the loan may extend beyond 5 years if it is for the purchase of a primary residence of the participant. Peace, Joel L. Frank
  4. Chuck said: many annuity products do offer loans, and of those, most allow them on the fund owner's primary residence ================================================== Chuck, Are you saying the primary residence is given as security for the loan? A Qualified Pension Plan (QPP) like a STRS may offer a loan benefit at a lower interest rate. Additionally with a QPP loan you are a debtor of the Plan so your individual investment account is not touched. The loan amount is taken from the Plan's assets. Your investment account in the QPP is used as collateral in the event you die prior to full repayment of the loan or in the event you default. This constrasts with a 403(b) loan where your investment account is debited for the loan amount and credited back with each repayment amount. For this reason it is poor financial planning to borrow from 403(b) arrangements. 403(b) loans must be repaid within 5 years. Peace and Hope, Joel L. Frank
  5. JLF

    Changing Jobs

    A 403(b) arrangement is for the benefit of employees of a 501©3 employer and public schools. Investment is made via salary reduction. Insofar as you are a private contractor you do not qualify to continue to make contributions to the account unless you are a not for profit contractor under section 501©3 which I assume you are not. Peace and Hope, Joel L. Frank
  6. No Peace, Joel L. Frank
  7. Scott, How could the AFT put out a Shark Attack report and then endorse/sponsor ING. Is this simply a case of the left hand not knowing what the right hand is doing? Also, is there a website for this AFT/ING product? Peace, Joel
  8. Steve, Is ING the endorsed 403b vendor of the AFT?
  9. Steve, What is utterly amazing is the fact that even though the AFT knew about the sponsorship of Opportunity Plus/Opportunity Independence by its largest State affiliate, the NYSUT, it went ahead and published to its great credit, the Shark Attack report. The financial agreement between NYSUT and ING makes the union a recipient of soft dollars. It is acting as a broker. Peace and Hope, Joel
  10. Let's see what the American Federation of Teachers think of Variable Annuities for 403(b) investing. Peace, Joel ==================================================== AFT Home > Publications > On Campus May/June 2000Index Page Current Issue Previous Issues May/June 2000 by Don KuehnShark attack!Investors in 403(b) plans, beware:You are especially vulnerable to predatorsTeachers, college professors and other education workers are being threatened by sharks--but not the kind that swim in the sea! These equally dangerous predators are "land sharks" who prey on unsuspecting or uneducated investors and devour their hard-earned retirement money. It's time we put a stop to them.Under Internal Revenue Service Code section 403(b), employees of educational and charitable organizations are eligible to participate in pre-tax investment arrangements usually called tax-sheltered (or tax-deferred) annuities (TSAs or TDAs). These popular but little understood investments are used by an estimated three-fifths of public school employees and many college and university staffs to augment state or local defined-benefit retirement plans.In many ways, TSAs resemble 401(k) plans that have become widespread during the past 10 to 15 years. The TSAs allow the participant to put money aside in a variety of investment vehicles before Uncle Sam gets his hands on any of it. The invested money grows tax free--until it is withdrawn through regular (annuitized) payments after retirement--although the amounts are subject to Social Security withholdings. Sounds good. So, what's the problem?The returns that participants realize on their investments are all too often way below returns on comparable investments in the marketplace. The reason is that many companies and salespeople in the business of selling financial instruments can think of countless ways to part investors from their money. These include high front-end costs, massive surrender charges, redemption fees, inappropriate investment choices, sub-account fees, two-tier plans, big commissions and hidden charges for unneeded life insurance.Unlike a standard employer-managed pension plan, in 403(b) plans the employer keeps an arm's-length relationship with the vendor. Because the employer typically does not contribute to the plan, schools and colleges neither recommend nor make judgments about which companies have access to the pre-tax payroll deductions that make TSAs work. There is no "plan document" to govern the employer's service arrangement with vendors. That means no federal paperwork, no fiduciary relationship and low administrative costs.It also means no investor education.For workers, it means that just about any insurance agent who can round up a minimum number of subscribers can hawk annuities or mutual funds. So, in Los Angeles, for example, more than 100 vendors create a bewildering array of investments and options to sift through. Financial products are pitched with dizzying variety in school lounges, cafeterias and in home visits by the sharks. Because there are so many different products to choose from, it is nearly impossible to become an educated consumer.More than $422 billion is invested through 403(b) arrangements and, sadly, most of it sits in low-performing fixed annuity contracts, reports Spectrem Group/Access Research, a San Francisco-based consulting and research firm. Some 2 million public school teachers have more than $116 billion invested in 403(b) programs.Only 15 percent of total TSA assets are invested in mutual funds. The big fund companies that fight tooth and nail for 401(k) investors generally cede the 403(b) market to insurance companies and their annuity products.In spite of a roaring stock market that has run nearly unabated for more than five years, these TSA contracts may be netting less than the return on certificates of deposit. Over the work life of a typical participant, underperforming assets could cost hundreds of thousands of dollars in unrealized growth.Agents whose companies have a computer slot for payroll deduction for TSAs in a school district or college are expert at promoting, explaining and selling their products. And certainly there is an allure to the idea that--in addition to a state retirement system and Social Security--for those who participate and qualify, a relatively painless investment each payday (unseen and before taxes) can grow to eye-popping numbers.Once the hook is set, few participants monitor their statements or check the relative performance of their TSA against a benchmark such as the S&P 500 stock index or a corporate bond index.What the law allowsUnder the law, education employees can shelter up to $10,500 this year in a 403(b) plan with some limitations (you cannot exceed 25 percent of salary). Three broad categories of investments are allowed: annuity contracts, mutual fund custodial accounts, and life insurance contracts.An annuity contract is an insurance company's written promise that, after retirement, it will pay a monthly amount to the participant no matter how long the person lives. These can be either "fixed" or "variable."The problem with buying an annuity inside a tax-preferred investment vehicle like a 403(b) is that earnings on the annuity are already tax-sheltered. It's like buying an umbrella exclusively for indoor use.In a "fixed" annuity, the contract has a guaranteed interest rate of usually no more than 3 percent or 4 percent. A $100 investment in a fixed annuity might be guaranteed to earn $3 or $4 over the year, but could earn $5 or $6 if market interest rates go up and the issuer elects to pass those rates on to the customer.A "variable" annuity contract's cash value rises or falls depending on the performance of separate accounts that are invested in mutual funds. There is no guarantee that these "subaccounts" will meet their investment objective.Mutual fund custodial accounts allow a participant to buy into a fund held by a bank or by (some) registered securities broker/dealers. Mutual funds are pools of assets (company stocks or corporate bonds, for example) managed with specific objectives in mind. Most readers are familiar with names such as Vanguard, Fidelity and T. Rowe Price, purveyors of a broad array of funds in the commercial marketplace.A life insurance contract obligates the vendor to pay a specific sum of money when the insured person dies. There is no mystery here; life insurance is a common ingredient in nearly everyone's financial planning. Premiums are determined by the age and health of the insured. In a 403(b) plan, however, the life insurance component is called "incidental" and must meet complex rules and limits set by the IRS Code and by state insurance laws.In many cases, the vendor can offer "multiple-choice" annuities. You can have a percentage of your deduction invested in a fixed contract and the rest in a variable product. This gives the participant a chance to practice what is known as "asset allocation," a way of tempering risk by investing both in conservative (fixed) and more aggressive (variable) components. The costsA teacher who invested in variable annuities during this decade--even if it was through high-priced mutual funds or annuity contracts--might not have noticed the exorbitant fees they were charged. The roaring bull market masked the high costs. But if we have another period like 1973 to 1983, fees could easily overwhelm any growth in the value of a TSA.How costly can fees become? Here is an example borrowed from Steve Butler and cited in an article in the New York Times. A couple contributes $10,000 a year to a retirement program through equal deductions twice a month. If they earn 10 percent a year, after fees, they will have $641,000 after two decades. After three decades (through the magic of compounded interest) their portfolio will have grown to $1.9 million.But if their annual fees are just 1 percent higher, so they earn 9 percent on their investments, they will have $75,000 less after 20 years and $355,000 less after 30.Annuities, the most common vehicle for 403(b) plans, come wrapped with a layer of insurance and extra fees.Surrender fees, assessed if the annuity is sold within seven to 10 years after purchase, can be as high as 8 percent. Life insurance, covering only the amount invested (not growth on the investment) runs about 1.25 percent. Some insurers will guarantee a minimum amount of investment growth, but little more than can be realized in the most conservative investments.The average 403(b) annuity charges administrative costs of 2.11 percent of assets a year, according to Morningstar Inc., a financial research firm. By comparison, the average mutual fund has expenses of 1.36 percent. Many large mutual funds, such as those offered by the Vanguard Group, have expenses as low as 0.18 percent of assets each year. Compounded over the span of one's career, this difference in fees means serious money.Get out the shark repellentThe marketing of 403(b) products to school employees typically depends more on the one-on-one relationship between the sales agent and the prospective customer than it does on the investment's cost, expected returns or its features.Many educators will acknowledge that they are novices at investing (never having had much money to invest) and that they need any help they can get. Vanguard and Fidelity won't send someone to sit across the kitchen table and hold their hands like insurance companies do.That makes public school and college employees easy prey for the sharks who feed on these plans. Historically, it has been difficult for participants to get out of these low-performing annuities and into better mutual funds. Surrender fees are one part of the story, roadblocks put up by vendors are another. Some school systems are revamping their 403(b) offerings. In Chicago, for instance, a new program is expected to save employees more than $6 million a year in fees. Before the change, according to a school official, teachers paid 2 percent to 3 percent in fees and more than two-thirds of their money was tied up in fixed investments. Now Chicago school workers can buy no-load funds and reduced-fee annuities through three companies.The New York State United Teachers, Education Minnesota and the United Federation of Teachers (New York City) have also used their significant clout to force positive changes in the 403(b) options offered to their members and to reduce administrative expenses.Stop the bleedingSo, you do your homework and find that you have a two-tier, fixed annuity that charges a surrender fee. Although it declines over the first seven years, it's renewed each time you make an investment (kind of a Catch 22 since you make investments every month). The rate of return is guaranteed at only 4 percent, and the cost of the life insurance component is eating up more than 40 percent of the guaranteed gain.There are steps you can take to remedy a bad situation (see sidebar, "What you should know"). Employees need to act if their 403(b) options are turning them into shark bait.Because most public employers do not screen vendors, a relatively small group of workers can petition for new and better choices in their TSA accounts. These may include some of the bigger mutual fund companies mentioned in this article, or others interested in doing business with your system.The union can make this an issue in future negotiations. Contact your local, volunteer to be on a committee, investigate your options, make a presentation to the school board, write a column for the union's newsletter...raise hell. This is your money. That's not to say it will be easy. Stephen Schullo, a Los Angeles teacher, is becoming something of a celebrity on this issue. He was horrified to discover the confusing, underachieving choices he and his colleagues faced in their 403(b) program. His tale has been reported in the Los Angeles Times, the New York Times and other publications.Some insurance vendors and other providers are lowering fees or broadening investment options in the face of competition and employee complaints.If you hold an annuity contract executed more than five years ago, it is likely you are paying too much. Seek out the agent who sold you the contract to see about converting it to another, better-performing, lower-priced option offered by the same company. If conversion isn't possible, find out about surrender charges. It may be better to pay a penalty than to continue suffering with an underperforming annuity. Consider getting out before you leave any more blood in the water. Don Kuehn, a senior national representative and a trustee in the AFT employees' retirement plan, is the author of "Your Money," a regular column in this newspaper. John Abraham, AFT senior associate director of research, contributed to this article. This article is intended to increase knowledge and awareness of issues of interest to members and retirees. For specific advice relative to your personal situation, you should consult competent legal, tax or financial counsel.Related SidebarWhat you should know American Federation of Teachers, AFL•CIO - 555 New Jersey Avenue, NW - Washington, DC 20001Copyright by the American Federation of Teachers, AFL•CIO. All rights reserved. Pographsand illustrations, as well as text, cannot be used without permission from the AFT.
  11. Scotty, You are entitled to receive directly from NYSUT Benefit Trust, Inc.; a copy of its most recent Form 1023 as filed with the IRS. An email request is supposed to be fullfilled within 24 hours. Ask for copies of all other documents that are opened to public inspection. Make your email request to Lynette Metz at: lmetz@nysutmail.org. Let us know how you make out. Peace and Hope, Joel
  12. Here is another Q & A from my column. Peace and hope, Joel ===================================================== December 12, 2003 (K) Q.: I bring your attention to Sean F. Beliles’ (Regional Manager of Travelers) Letter to the Editor of November 7, 2003. He is a strong advocate of lifetime annuitization of 403(b)/TDA balances while you are not. He says you overlook the guarantee of having a variety of flexible annuitization options as well as not taking into consideration the guaranteed death benefit during the accumulation period. Please reply to these criticisms. AK A.: First a comment on after-tax annuities. An after-tax annuity is a meaningful way to save money over the long term. Its main feature is the deferral of taxation on the interest/gains generated by the investment. So let’s assume you withdraw $30,000 from your bank account and buy an annuity for $30,000 that guarantees you 6 percent per year. The interest of $1800 per year (.06 $30,000) is not taxed so long as it stays in the annuity. Let’s assume after 24 years the account value is $120,000 and you cash it in although there are many other payout options. $30,000 is your original after-tax investment so you receive it tax-free. $90,000 is accumulated interest that you must pay tax on. This kind of annuity is called a Single Premium Deferred Annuity (SPDA) because the premium (cost) of the annuity ($30,000) was already income taxed. This contrasts with keeping the $30,000 in a savings bank where each year you must pay income tax on the interest. For some, the use of an annuity may be a smart way to defer the tax on the interest/gains on an after-tax investment. It should be used only after you have maxed out on pre-tax investing (403(b)/457(b)/401(k)) for retirement. If you are a candidate for an after tax annuity please purchase it from a no-load/low cost provider (no sales commission, no 12b-1 fees and no cash surrender charges) so your money will grow faster. I recommend the Teachers Insurance and Annuity Association (TIAA). Now let’s turn our attention to the use of an annuity for pre-tax or 403(b) investing. Why pay Travelers for tax-deferral on the interest when you get it for free via section 403(b) of the Internal Revenue Code? Using an annuity for 403(b) investing (or any other pre-tax investment plan) is like using an umbrella indoors. It is meaningless. The investment vehicle of choice is the no-load mutual fund because if not for section 403(b) the interest/gains generated by a mutual fund investment is taxable every year. Now let’s address the payout options. The 1.25 percent annual charge for insurance is simply predatory. Why should you pay Travelers, long before you retire, for its promise to pay you a retirement income for life? Of course Travelers offers a variety of annuitization options but each one has the same negative thing in common: You, the annuitant, must transfer the title to your money to Travelers. Let’s analyze the popular annuity income option known as “joint and equal to the survivor” option. Let’s assume Arthur is 60 and his wife is 58 and Arthur has $500,000 in his Travelers 403(b)/TDA account and wants to guarantee the same lifetime income to his wife, if she survives him, for the remainder of her life. We first must determine that Travelers will guarantee a “maximum” to Arthur of about $50,000 per year for Arthur's life only (no provision for a beneficiary). So in order to guarantee a 100.0 percent survivor benefit to his wife he will have to accept about 15 percent less or $42,500 per year for his life with the provision that, if his wife is alive upon his death, she will continue to receive $42,500 for the remainder of her life. Thus, in order to provide a lifetime income to his wife, while they are both alive, Arthur must accept 85 percent of “maximum” (.85 $50,000). In my judgment this is not in the couple’s best interest and should be avoided because: 1. Arthur must legally transfer the title to $500,000 to Travelers. 2. While both spouses are alive they must accept less income when more income is needed. 3. Arthur already has two guaranteed lifetime incomes: A city pension and Social Security. I urge Arthur never to annuitize his TDA account with Travelers but to use life expectancy tables starting at age 60 instead. With life expectancy tables the title to the $500,000 always remains in Arthur's name. The use of the City’s 401(k) Plan is best for this purpose. Whether you plan to use an annuitization option or life expectancy tables the decision on a distribution option does not have to be made until you are 70.5. So even if you, contrary to my advice, “annuitize” wouldn’t you be much better off if you started to pay for the annuity income guarantee when the annuity income begins rather than years or decades before? That 1.25 percent annual insurance charge along with $30.00 Annual Contract Administrative Charge would be much better spent on growing your 403(b) investment. These are the reasons why the use of an annuity income provider (insurance company) for the investment of your salary reductions during the accumulation phase makes absolutely no sense and is down right injurious to the growth of your money. As I said in my Column of August 15, 2003: “If you are so inclined to annuitize during retirement, you can always roll your money over from a low cost mutual fund 403(b) provider to a low cost immediate annuity income provider like TIAA-CREF with a total expense ratio of 0.50 percent. I assure you TIAA-CREF offers the same variety of annuitization options as Travelers and at ¼ the cost. Lastly I would like to say a word about the guaranteed death benefit during the accumulation period. Travelers refers to this benefit as their “Beneficiary Protection” feature. It guarantees that the beneficiary will receive the greater of the participant’s current contract value, the total investment made into the contract, or the contract value on the latest fifth year anniversary of the contract. This is nothing more than disguised life insurance protection that increases the cost of the Universal Annuity contract. Again, city employees have a generous city paid life insurance benefit as well as Social Security survivors’ benefits. So if there is a need for additional life insurance it should be bought separately and at a lower cost. It should not be forced upon you as part of the cost of 403(b) investing. It’s like having your favorite supermarket tell you that they only sell milk packaged with an apple pie. You are forced to buy the apple pie even though you just want the milk. I recommend TIAA for low cost life insurance.
  13. Chuck: You clearly gave the impression that the "scandals" has not and will not reach the VA industry. I know you are a busy guy so when you have a moment you may want to digest the following: Peace and Hope, Joel ===================================================== Reader e-mails tell me there’s still more rot in the fund industry that’s about to be exposed. Here's what could be next -- and what might happen to the industry as a result. By Jim Jubak Here’s a prediction for you: A year from now, the mutual fund scandals still will be going strong. The list of those being investigated will have expanded to include new mutual fund companies. And the crimes under investigation will have grown as well to take in parts of the money management business, such as annuities and trust departments, which so far haven’t been implicated. Don’t believe me? You don’t have to take my word for it. That’s the consensus that emerges from the e-mails of readers who know the money management industry best. Those readers believe that the current investigation has just scratched the surface. Let me share some of that mail with you. (Names and details have been omitted or changed, of course. Many of these e-mails are from people who manage money for a living and who would like to keep their current jobs.) Money 2004. Smarter, faster and easier than ever. Double-dipping on fees by banks Much of the current scandal involves incentives mutual fund companies pay to brokers who sell their funds. The point of these arrangements is to give brokers extra commissions for selling specific funds to customers even if these funds are not the ones best suited to customer needs. Sometimes, the mutual funds being sold are managed by the brokerage house itself. Sometimes they’re the funds of companies with special arrangements with the brokerage house. And sometimes, as the recent settlement with Morgan Stanley (MWD, news, msgs) revealed, a single sales force can cash in both ways. But there are more fee deals that need to be investigated, according to my e-mail correspondence. “Spitzer hasn't touched on a new scandal flying way under the radar,” writes a reader from the South. “The trouble is with the mutual funds run by banks and their cozy fee arrangements with their own trust departments.” Trust companies at some banks, this reader claims, invest trust money in mutual funds run by the bank itself in order to bring in higher management fees and commissions to the parent bank even when the fund isn’t best suited to trust beneficiaries and even, this reader says, when beneficiaries object. The result is classic double-dipping when the trust account winds up paying management fees to the bank for trust management and for mutual fund management. I’m inclined to agree that bank trust departments are likely to prove rewarding hunting ground for investigators. For example, it’s the wealth management unit at U.S. Trust that has drawn Charles Schwab (SCH, news, msgs) into the mutual fund investigation. Regulators are examining possible late trading at U.S. Trust’s Excelsior funds unit. (Schwab acquired U.S. Trust in 2000.) Undisclosed fees in annuities and other products. In the last decade, the mutual fund industry has been tremendously successful in repackaging mutual funds into new products such as annuities and brokerage wrap accounts. And that struck more than one reader as an area in need of investigators’ attention. A money manager from the West Coast suggested two prime targets for exploration: “One, annuities and how fees are charged and calculated; two, the use of proprietary mutual funds in the retirement plans of vendors, banks, etc. with minimal due diligence and indifference to share class so that plans investing billions of dollars use retail shares with higher fees and commissions instead of cheaper institutional shares.” Mutual fund fees and expenses are hard to calculate since the official “expense ratio” reported by a mutual fund is allowed, by regulation, to exclude all kinds of charges eventually paid by investors. The costs of buying and selling stocks and bonds and including any brokerage fees don’t count in the reported expense ratio, although they are paid by fund shareholders. But expense and fee disclosure can get even murkier when a mutual fund is repackaged as an annuity. That allows the financial industry to add on another layer of fees and to disguise, if the fund company is so inclined, the total cost of the product. More manipulation of the rules against shareholder interest At the heart of this scandal has been the willingness of mutual fund companies to manipulate or ignore their own rules forbidding market timing. The companies, or their brokers, did so for the benefit of a select few outside money managers and hedge fund operators, and to pad the pockets of individual fund managers and fund company executives. So why not look at other areas where fund companies have internal rules but are expected to police themselves? “Has anyone investigated,” asks one reader who has had money with Putnam Investment Management in the past, “the possibility of mutual fund companies’ skimming a bit more off shareholders by dragging their feet on conversion of B shares to A shares? Those extra basis points charged by B shares add up to a lot of dollars each year.” This reader notes that a Putnam service representative recently said that it can take up to a year to convert fund shares from one class to another. It’s not just bad apples These readers’ concerns might seem to involve just nickels and dimes compared to scandals involving $6,000 curtains or $2 million birthday bashes. But fundamentally they represent something more important. These kinds of charges, you see, represent systemic corruption in the industry, and they can’t be dismissed as the actions of just a few bad apples. So what happens to the fund industry if my readers are correct? Since there’s an almost endless supply of individual infractions to bring to light and just about any firm that manages or buys and sells mutual funds can be subpoenaed, the scandal will run as long as investigators can get headlines and generate public anger with their work. In other words, the limit to these investigations isn’t the supply of wrongdoing. Instead, because of the nature of these charges, the limit is investigators’ self-interest. The scandals only finally stop when the public has convincingly lost interest and various attorney generals and investigative bureaucracies move on to some other scandal. How long will that take? Credible reform efforts by United States Congress and the Securities and Exchange Commission could encourage the public to turn its attention elsewhere sooner rather than later. So, too, could better performance by mutual funds. It’s no coincidence that this investigation is taking place in the aftermath of the bear market in stocks that started in March 2000. When stocks were soaring, no one really worried if fund companies were skimming off a few pennies. It took truly terrible performance by mutual funds to focus investors on the very real abuses of trust in the industry by specific fund families. But it’s possible to get too cynical and say that this scandal is all about investors taking revenge on fund companies for their own stock market losses. Many of the worst offenses by mutual fund companies were the result of fund companies trying to boost revenue and profits to offset declines in the assets they managed due to poor investment performance by the company’s funds. The connection between poor investment performance and the anti-investor practices that have come to light in these investigations will shape, I think, the industry that emerges from this scandal. Fund companies that are well-managed, have delivered decent performance for shareholders and have not committed major violations of shareholder trust will be able to dig firebreaks around themselves. The firewalls will prevent the flames that are now sweeping across the industry from scorching them as well. My view: SEC will make only modest changes The incentives to do so are huge. Any company that can successfully differentiate itself from the dishonesty of the pack will be able to pick up billions of dollars in assets from weaker players in the mutual fund industry. And investors can expect a wave of consolidation in the fund industry as this process plays out. How big a wave of consolidation will depend on how deeply any new regulations cut into the profits that mutual fund companies now make from directed brokerage, from hidden fees, from double-dipping and the like. If regulations require mutual fund companies to compete for investors on the basis of price and performance, then the inefficient companies in the industry will go under. That will produce a huge consolidation as the assets now controlled by companies that rely on paying brokers to sell their funds struggle to compete with houses like Vanguard and Fidelity. But if, as I expect, any new regulations only require changes at the margins and leave the economics of the brokerage-sold fund companies essentially intact, then the consolidation will be much more limited. In that case, I think investors will see a fund industry evolve with huge efficient producers on one end that struggle to drive their costs down to the levels of today’s super-low cost ETFs (exchange-traded funds). This part of the industry is likely to undergo rapid introduction of new products as fund companies try to innovate their way through the challenges posed by the new ETF products. The other end of the industry will be dominated by companies with huge sales forces that can push product to consumers. Consolidation will eliminate the smaller sales forces, and investors are likely to see increasing acquisitions of delivery pipelines such as banks, trust companies, investment advisory services that represent “captive audiences” that can be sold mutual fund products by armies of brokers. In that world, the choices in front of investors will be clearer than ever, if we get reforms to the rules for disclosure and fee calculation that will let us see the real difference between products. At a minimum, it’s that kind of disclosure -- of all fees and costs, of all marketing arrangements and their fees, of all relationships between fund providers and fund marketers -- that we need to be fighting for over the next year while the scandal is still at center stage. Without those reforms, and they are in my opinion only a bare minimum, the mutual fund industry will be very different in the future than it is now, but investors still won’t be able to tell the good guys from the bad. -------------------------------------------------------------------------------- Fund data provided by Morningstar, Inc. © 2003. All rights reserved. Quotes supplied by Standard & Poor's ComStock, Inc. and are delayed at least 20 minutes. NYSE, AMEX, and NASDAQ index data are provided real time. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances. Try MSN Internet Software for FREE! 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  14. CHUCK SAID: 3) In today's environment, one can make the argument that the mutual fund industry is corrupt and badly regulated. Yes, your EXPENSES are low, but so is your GROSS RETURN because the easy money has already been skimmed off into someone else's pocket. JOEL'S REPLY: THE SAME ABUSES CAN OCCUR WITH THE SUB ACCOUNTS IN A VARIABLE ANNUITY. VARIABLE ANNUITIES AND MUTUAL FUNDS ARE BOTH REGULATED BY THE SEC AND THE NASD. Following is an article that reveals that the sub-accounts of Variable Annuities are quilty of the same corrupt practices. Peace and Hope, Joel ==================================================== FundExpenses.com INDUSTRY REPORT November, 2003 Max Rottersman 212-254-3232 fundexpenses@yahoo.com Excessive Trading in Variable Annuity Funds: Putnam Again Leads The Way Putnam may not have fired (and the S.E.C. is suing) Justin Scott and Omid Kamshad because of their 1998 trading manipulations of their funds. Their scheme may have moved over to those sleepy VA funds behind insurance contracts. It seems they manage those too. Putnam's "Variable Trust" is a collection of 28 funds bought solely through insurance products; that is, variable annuity contracts. These funds do not appear in most fund lists, Yahoo! for instance. They're below the radar. However, these funds are not small-fry; they totaled $23 billion in assets in 2002 and earned Putnam $138 million in advisory fees. Below is a list of the funds in the trust ordered by assets. Fees (all figures 000s) Putnam VT Portfolios 2002 Advisor Admin Total Directors Assets GROWTH AND INCOME FUND 31,382 48 35,774 74 6,606,610 VOYAGER FUND 22,264 42 24,826 85 4,093,814 NEW OPPORTUNITIES FUND 13,775 33 15,254 8 2,398,805 INCOME FUND 6,402 23 7,711 36 1,080,851 MONEY MARKET FUND 3,982 16 5,131 32 997,213 GLOBAL EQUITY FUND 7,061 19 7,743 27 939,060 INTERNATIONAL GROWTH FUND 5,725 13 7,460 27 746,042 INVESTORS FUND 4,172 14 5,126 23 666,050 HIGH YIELD FUND 4,394 14 5,243 24 648,511 THE GEORGE PUTNAM FUND OF BOSTON 3,661 15 4,575 22 575,583 DIVERSIFIED INCOME FUND 3,907 14 4,856 22 567,659 VISTA FUND 3,557 13 4,509 21 559,187 GLOBAL ASSET ALLOCATION FUND 3,732 11 4,710 21 540,087 NEW VALUE FUND 3,633 11 4,183 20 524,558 UTILITIES GROWTH AND INCOME FUND 3,557 12 3,973 17 515,488 SMALL CAP VALUE FUND 3,619 10 4,487 16 455,187 HEALTH SCIENCES FUND 2,778 9 3,437 15 396,247 AMERICAN GOVERNMENT INCOME FUND 2,319 10 2,890 12 359,531 INTERNATIONAL GROWTH AND INCOME 2,313 9 2,649 17 289,027 RESEARCH FUND 1,757 9 2,275 15 269,902 INTERNATIONAL NEW OPPORTUNITIES 2,572 9 3,224 16 256,998 OTC AND EMERGING GROWTH FUND 860 8 1,162 13 122,528 GROWTH OPPORTUNITIES FUND 554 6 826 10 79,033 ASIA PACIFIC GROWTH FUND 403 5 517 9 64,660 CAPITAL APPRECIATION FUND 165 4 304 3 25,350 TECHNOLOGY FUND 197 3 305 8 25,302 VOYAGER FUND II 172 2 400 3 24,372 138,913 382 163,550 596 23,827,655 When an investor purchases a variable annuity contract they allocate their money in a combination of those funds. Most investors in variable annuities don't move their money around much--tax deferred death-benefit insurance is their primary goal. (Investors wanting to "play" the funds would purchase the typical retail version.) Therefore, the monthly sales and redemptions activity for most variable annuity funds is lower than their retail counterparts. Below is both the retail and insurance versions of the Putnam Diversified Income fund. I'm showing total dollar flow (absolute sales plus redemptions) against the fund's assets. As you can see, there is very little fund-share activity in VAs. Most people buy them and forget them. This fact will greatly help shareholders prosecute the claims. Most fund companies, like Putnam, put in redemption fees on international funds in the late 1990s to discourage market timers of various stripes. In the chart below you will see how heavy trading of international funds in Putnam's "Variable Trust" abated in 2001, except for one fund--International Growth. This is the only fund that Omid Kamshad has been the Portfolio Leader since 1996 (he is now being sued by the S.E.C.). However, in a prospectus filed at the beginning of 2000 Justin Scott is listed above Mr. Kamshad as a portfolio manager of the fund. Did they work together on the market timing of the International Growth fund? It's sister fund, the International Growth and Income fund has George W. Stairs as its Portfolio Leader since 1994. This fund does not appear to have been manipulated. Note, even in Putnam there are people like Mr. Stairs who always put their shareholders first. Why didn't the Directors reading Putnam's annual reports pick up on the problem at the International Growth fund in 2002? In other words, you don't need to look at the monthly numbers. The annual report shows the problem to anyone who bothers to look. Putnam VT International Growth Fund Shares Sold 2000 2001 2002 Class IA $492,219,557 $263,584,498 $80,419,310 Class IB $471,505,315 $911,390,877 $1,179,792,944 Total $963,724,872 $1,174,975,375 $1,260,212,254 Assets $845,028,000 $803,693,000 $734,720,000 % of Assets 114.05% 146.20% 171.52% Why would the Directors look at sales numbers in the admittedly sleepy VA funds? Because multiple insurance products can bring with them investors with conflicting goals. From Putnam's own prospectus: The funds currently do not foresee any disadvantages to policy owners arising out of the fact that the funds offer their shares to separate accounts of various insurance companies to serve as the investment medium for their variable products. Nevertheless, the Trustees intend to monitor events in order to identify any material irreconcilable conflicts which may possibly arise, and to determine what action, if any, should be taken in response to such conflicts. If such a conflict were to occur, one or more insurance companies' separate accounts might be required to withdraw their investments What's even more worrisome is that there was an increase in IB share trading (notice in table above) which may benefit Putnam Management to a greater degree. Again, where was the board of directors? The Trust has adopted a Distribution Plan with respect to class IB shares to compensate Putnam Retail Management for services provided and expenses incurred by it as principal underwriter of the class IB shares, including the payments to insurance companies and their affiliated dealers mentioned below. The plan provides for payments by each fund to Putnam Retail Management at the annual rate (expressed as a percentage of average net assets) of up to 0.35% on class IB shares. The Trustees currently limit payments on class IB shares to 0.25% of average net assets. Because these fees are paid out of a fund's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. Variable Annuity funds are the last place anyone should be allowed to market time. Putnam, a division of an insurance company, should have been especially sensitive to their shareholders (and policy-holders) long-term needs. -- Max Rottersman # # # Additional in-depth data is available at www.fundfinancials.com. Phone: 212-254-3232; Copyright © 2003 Max Rottersman.
  15. I write the Current Pension Topics column for The Chief-Civil Service Leader. This is a 100+ year old weekly newspaper based in Manhattan. Following is a recent issue of the Column. Peace and Hope, Joel L. Frank =================================================== November 28, 2003 Sean F. Beliles, Regional Manager, Travelers Educators Retirement Services reports to us that he was “disheartened” and “disappointed” (his Letter to the Editor of November 7, 2003) after reading my Pension Topics Column of August 15, 2003. To the contrary it is the skilled craftspeople at CUNY that should be “disheartened and disappointed” not Mr. Beliles, whose compensation from Travelers is based in part on the high cost Universal Annuity sold to these employees. Mr. Beliles should be elated. Insofar as CUNY employees (as well as all City workers) can look forward to two lifetime incomes, a Defined Benefit pension and a Social Security annuity, my advice is not to annuitize a deferred compensation account like a 403(b)/TDA. Having said that, I ask Mr. Beliles: Why is it that Teachers’ Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) charges 0.03 percent for these lifetime income guarantees (annuitization) while the Travelers charge 1.25 percent or 42 times as much? The great difference is largely due to the fact that TIAA-CREF is a direct distributor of its financial products while Travelers employs a network of “Financial Consultants” and “Account Executives” to distribute its products. The lower cost of the TIAA-CREF distribution process is past on to the customer. Moreover, a large part of the TIAA-CREF operation is non-profit while we all know that Travelers is a very large profit making financial services firm. Mr. Beliles asserts that I do not recognize the “guidance” and “advice” provided by the personal “Financial Consultants” employed by Travelers. On the contrary, it is Mr.Beliles that needs to stop the spin. In the instant case the employee can use the low cost provider TIAA-CREF or Travelers, the high cost provider. In either case the employee is NOT entitled to investment advice because s (he) is not paying for it. Both investment providers and the salespeople they employ are not in the business of giving investment advice, which is an all-together different business. They are in the business of selling product. I ask, Mr. Beliles: How many calls were initiated about three years ago by Travelers’ “Financial Consultants” to CUNY personnel advising them to get out of the stock market? And please tell me sir: How many calls were initiated by these “Financial Consultants” in the second quarter (April-June) of this year advising the same CUNY personnel to get back into the stock market? The fact is neither company initiated such calls because in order to furnish investment advice one must be registered, under the Investment Advisors Act of 1940, with the Securities and Exchange Commission as a Registered Investment Advisor (RIA). Mr. Beliles should be more careful with his use of the word “advice”. The investor is simply paying low fees (TIAA-CREF) or high fees (Travelers) to ACQUIRE investment product. After the purchase the employee/investor is on his or her own. He or she is free, however, to retain the services of a Registered Investment Advisory firm that, for an annual fee, will manage his or her 403(b) account regardless from whom s (he) ACQUIRED the investment product from, TIAA-CREF or Travelers. This RIA has absolutely no association with the investment provider. The million investors that Mr. Beliles boasts about that are clients of Travelers Life and Annuity Company should not come from the ranks of CUNY employees. No City employee should be forced to pay high fees in order to participate in a voluntary salary reduction retirement savings plan. In my view CUNY is guilty of a breach of trust by continuing to allow a high cost vendor to solicit just a handful of blue-collar workers. This is especially bizarre in light of the fact that the University has experienced overwhelming success with the TIAA-CREF Organization. TIAA-CREF has been available to practically the entire CUNY workforce for almost 40 years, long before the Travelers Annuity was made available to this small group of skilled trades people. I call on the University Trustees to make the TIAA-CREF available for 403(b) investing to the entire workforce. Additionally TIAA-CREF has, since 2002, added mutual funds on to its investment platform. The University has yet to request participation. I implore it to do so. And remember, the Trustees and the City’s Deferred Compensation Board are working to make the City’s 457(b) and 401(k) plans available to all CUNY employees. When all this comes together the Trustees, as well as the employees, can boast that they have the best set of salary reduction retirement savings plans in the nation. Hopefully, 2004 will be a banner year for CUNY Trustees and its employees. Question: On June 20, 2003 you reported on the NYSUT endorsement/sponsorship of two high cost 403(b) programs known as Opportunity Plus and Opportunity Independence provided by ING Financial Services. It is my understanding that ING pays NYSUT Benefit Trust in excess of $1 million annually in return for this endorsement/sponsorship. My son is on Wall Street and says the financial arrangement should be disclosed in the Prospectus. Could you look into this for us? Mark. Answer: The payment is almost $1.5 million per year. Here it is, directly from the Prospectus: “Agreement with the Company NYSUT Benefit Trust is a non-profit trust organized and existing under the laws of the State of New York. This Trust operates for the benefit of its members and agency fee payers of the New York State United Teachers. The Company (our, we) and NYSUT Benefit Trust agree to the following: · Sponsorship of the Opportunity Plus program by the NYSUT Benefit Trust; · Our provision, to all members and agency fee payers of educational programs focused on financial planning for retirement; and · Our employment of trained personnel to conduct these programs exclusively for members. Additionally: · We reimburse NYSUT Benefit Trust for direct out of pocket expenses up to a maximum of $40,000 per year incurred in the promotion of the Opportunity Plus program. · We will pay NYSUT Benefit Trust $338,000 per quarter during 2002. This payment will increase in subsequent years, and may include in the future, an asset-based component. NYSUT utilizes these amounts to enhance benefits to the participants in programs it sponsors. · We contribute to the cost incurred by NYSUT Benefit Trust for retaining up to six employees who assist in management of the Opportunity Plus program. · We compensate United University Professions $6,000 per month for the use of on-site campus facilities and the sponsorship of the Opportunity Plus program."
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