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mattk

American Fidelity Annuity

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Hello all, I currently read "The 403(b) Wise Guide" and was curious so I contacted my HONEST and STRAIGHTFORWARD af company and thought I would try the honest and straightforward approach. This is my email. If there is enough interest, I will post the response (if I get one). Also, I am paying 5% of my contributions. Is this high? I don't know if there are any other fees and they conveniently don't have a ticker symbol. Hope this makes sense.

 

I currently enrolled in an American Fidelity variable annuity account A and have been teaching for 7 years (this is my 8th consecutive year). I was trying to do some research and was looking for a ticker symbol so I could go online to view the account? Can you help? Also, I was reading "the 403(b)wise guide" and it says on page 16 " since a 403 b is by design tax-deferred, no further benefit is derived by putting a tax-deferred investment (A VARIABLE ANNUITY) into it... investing 403 (b) money in variable annuity is akin to using an umbrella indoors. Can you refute this claim. Thanks in advance. I await your response.

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You're paying 5 cents in order to invest 95 cents. So you need to earn 5.263 percent (.05 divided by .95) over the next 12 months in order to get back to the 100 cents you started with. This is why they call the 5% commission a

L O A D! It really is a L O A D of S _ _ _!

 

Peace,

Joel L. Frank

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Mattk,

 

Others will come online shortly to help you out...I suggest that you continue reading some of the must reads. There is plenty.

 

If you can purchase a low cost mutual fund in your 403(b), there is no good reason to instead purchase a variable annuity--especially if it's high cost. The salesperson should have told you, but annuities are always sold.

 

The only thing that is positive about purchasing a high cost variable annuity is that you are helping put the salesperson's kids through college.

 

Both using an unbrella indoors and wearing both suspenders and a belt is redundant. And fthe purchase a variable annuity for its tax deferred benefits is redundant. Plus it is way too costly of a product.

The average variable annuity costs teaches about 2.13% according to Morningstar. (but that figure is a moving target so you may have to check it).

 

You might consider just stopping your investments in your variable annuity. And better alternative now for you would probably be to start a Roth IRA. By next year the limit on IRAs may be jacked up to $5,000/year. So that would be an investment of more than $400/month.

 

If you can invest more, consider purchasing a low cost index fund or two.

 

Ted

 

 

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This info recently posted from Scott Burns:

 

VALIC, otherwise known as Variable Annuity Life Insurance Co., offers two contracts, one with 10 fund sub-accounts, the other with 65. Insurance expenses vary from 0.75 percent to 1.25 percent, with an average of 0.96 percent, somewhat below the industry average. Their total annual expense averages 1.78 percent, well below the industry average of 2.28 percent.

As long as the recent tax cuts for investment income last, however, you have some very attractive alternatives, if your income isn't too high.

 

First, you can contribute to an independent IRA account with a low-cost provider. This will reduce your income tax and get you the same tax deferral on investment income as the variable annuity. Your annual expenses, however, could be as much as 1.6 percentage points a year lower. (This assumes you invest in a Vanguard index fund such as Vanguard Total Market.)

 

Second, you can contribute to an after-tax Roth IRA account with a low-cost provider. This won't reduce your current income tax, but it will get you a tax-free return on money invested. If your tax rate tomorrow is the same as your tax rate today, it works out the same as a conventional IRA. Lower expenses would, again, beat the variable annuity option. The baggage of insurance expenses is an unnecessary burden on your long-term accumulation.

 

Third, you can contribute to an everyday after-tax taxable account. You can also invest in low-cost tax-efficient mutual funds – such as index funds – that will be lightly taxed because dividends and capital gains are now being taxed at only 15 percent. You can also accumulate iSavings Bonds, which will defer income taxes on your return and provide you with inflation protection.

 

That's a lot of alternatives.

 

All of them will work better for you than a moderate-cost variable annuity.

 

end quote

Ted

 

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Dear Mr. mattk :

 

We have received your email request concerning your Variable AF Prime Growth Annuity account.

 

There are no ticker symbols for these funds because they are not available to the general public. They are only available to institutional buyers, such as insurance companies, and can only be used as investment selections for variable products.

 

The unit values that we have are different than the ones listed on the regular stock exchange. Unit Value information is available on our Direct Access Line # . This automated line is available 24 hrs. a day, 7 days a week.

 

The only information needed to access the automated line is your Social Security number and a Personal Identification Number (PIN). Your PIN is your birth month and year. For example, if your birthdate is March 6, 1949, your 4-digit PIN number is 0349. If you wish, you may change this number by following the audio instructions.

 

An annuity contract not included as a retirement plan option has tax-deferral of gains/earnings until withdrawal. When included as a retirement plan option, such as a 403(b) plan, the plan rules that apply to the annuity contract are the same as the rules that apply to the other options allowed under the plan by the employer. The tax deferral of both the contributions and earnings are plan features not annuity contract features.

 

When choosing a funding vehicle for your 403(b) contributions, you should at the least consider the following:

1) What options are allowed by the employer

2) Customer service features of provider

3) Charges & fees

4) Death benefits features

5) Income/Distribution features and retirement

6) What options fit your investment risk profile and needs.

 

Please let us know if we can be of further assistance.

 

Cordially,

 

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I think you got a reasonable response:

 

My bias, however is, to suggest you consider the following:

 

1. What no-load, low cost options are allowed by the employer and if there are none to petition you employer for these. If you get no response/action, take a hike from your 403(b)...go Roth IRA...go to a taxable account that hs tax efficiency features (Ask Vanguard)

 

2. Charges & fees should be your #1 concern. If you are paying 2.22% a year, your retirement nestegg will be about 50% lower after a 40 year carrer. Would cvan afford that loss?

 

3. Customer service features of provider--if you need help, you must be prepared for it. Wise to curl up with a good Bogle book.

 

4. If you a death benefit, then better to buy some term insurance

 

Ted

 

==============

 

 

When choosing a funding vehicle for your 403(b) contributions, you should at the least consider the following:

1) What options are allowed by the employer

2) Customer service features of provider

3) Charges & fees

4) Death benefits features

5) Income/Distribution features and retirement

6) What options fit your investment risk profile and needs.

 

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Hi Mattk,

Your answer is from an insurance agent when he/she says ..."such as a 403(b) plan, the plan rules that apply to the annuity contract are the same as the rules that apply to the other options allowed under the plan by the employer" is totally misleading. He is only talking about the IRS rules which supercede all plans. What he is NOT saying is that the "other options" that you might have may be custodial accounts with mutual fund companies. Mutual fund companies have very different contractual rules between you and the company, for example, lower expense ratios, no surrender fees, no M & E costs, and no commissions (the insurance component of a 403b annuity, M & E, is completely useless and expensive, remember you have to die to benefit from it and you only get the loss back on your account. If you have a gain, there is no loss and there is no benefit, but you have paid for it for years and years. IT IS A RIPOFF!!!). As Ted pointed out, look for a no-load mutual fund company such as Vanguard or the one good annuity company TIAA CREF and get term life insurance. Let us know what other options you find.

Good luck,

Steve

 

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"An annuity contract not included as a retirement plan option has tax-deferral of gains/earnings until withdrawal"

 

Joel's response: THIS SITUATION REFERS TO ONE WHO INVESTS IN AN ANNUITY WITH MONEY THAT HAS ALREADY BEEN INCOME TAXED. BECAUSE AN ANNUITY IS AN INSURANCE PRODUCT ALL OF THE GAINS/EARNINGS ON THE INVESTMENT ARE TAX DEFERRED UNTIL WITHDRAWN. THESE ARE THE RULES OF A SINGLE PREMIUM DEFERRED ANNUITY.

 

"When included as a retirement plan option, such as a 403(b) plan, the plan rules that apply to the annuity contract are the same as the rules that apply to the other options allowed under the plan by the employer. The tax deferral of both the contributions and earnings are plan features not annuity contract features."

 

Joel's Response: SO ONE NEED NOT USE THE ANNUITY CHOICE (AN INSURANCE PRODUCT) OFFERED BY A 403(b) PLAN IN ORDER TO GET TAX DEFERRAL ON THE GAINS/EARNINGS. STICK WITH NO-LOAD MUTUAL FUNDS.

_________________________________________________________

 

Here is yet another way to look at the issue. Let's take the CalPERS, the largest tax-deferred retirement account in the world. The hundreds of million of dollars California public employers contribute each year goes in completely tax deferred and the gains/earnings on those contributions are also tax deferred. All of this tax-deferral is gotten via section 401(a) of the Internal Revenue Code. The withdrawals/pensions are fully taxable to the employee.

 

In order to save money on expenses and thus have more money available for employee benefit purposes an "employee benefit trust" was established by the State of California rather than investing these hudreds of million of dollars in a group annuity contract with its much higher expenses.

 

Employees have the same CHOICE when it comes to section 403(b). Investing in no-load funds through an individual custodial account under section 403(b)7 is the exact same thing as investing in an "employee benefit trust" in lieu of the expensive annuity.

 

SO IF THE STATE OF CALIFORNIA RECOGNIZES HOW ABUSIVE THE USE OF THE ANNUITY PRODUCT WOULD BE IF USED DURING THE ACCUMULATION PHASE DOESN'T THE SAME CONCLUSION APPLY TO SECTION 403(b)?

 

Peace and Hope,

Joel L. Frank

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Chipping away at what's left

Some mutual funds have annual expenses of 2 to 3 percent. During better economic times that doesn't seem so unreasonable, but now investors are realizing that those fees can really add up in the long term.

By HELEN HUNTLEY, Times Personal Finance Editor

© St. Petersburg Times

published August 31, 2003

 

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

 

 

When mutual funds were generating returns of more than 20 percent, losing a percentage point or two to expenses each year didn't seem like such a big deal.

 

Now it does.

 

With three years of stock market losses behind us, savings yields barely above zero and modest expectations for the future, fund fees are now on the financial world's radar screen. Lawyers, regulators, lawmakers, analysts and even some normally oblivious investors are asking questions about why mutual fund expenses are so high and whether fund companies should do a better job of disclosing them.

 

"The bear market has given many people good reason to take a close look at their investments, why they own them and whether there are better alternatives," said Brian Portnoy, senior fund analyst for Morningstar, the mutual fund research company in Chicago. "If you don't comparison shop on other products and services, you're not going to get the best deal. The same is true with mutual funds."

 

There are now more than 8,000 U.S. mutual funds, which together have $6.9-trillion in assets. And there are dramatic differences in expenses from one mutual fund to the next. Some funds have an initial sales charges of 5 percent or more for new investments; some have none at all. Some funds have annual expenses of 2 to 3 percent; some have expenses of less than 1 percent.

 

Over the long term, the impact of higher fees can be huge.

 

Take two investors who each put aside $10,000 in a stock fund that earned 10 percent before expenses. The one who put the money in Alliance funds, with their average 2.12 percent annual expense charge, would have $4,209 less at the end of 10 years than the investor paying Vanguard's average expense of 0.31 percent.

 

And the lower the rate of return, the bigger the proportion of an investor's total earnings consumed by expense charges.

 

"If you're paying 2 percent of your return for expenses in an environment where many people are expecting an 8 percent overall return in the market, there goes 25 percent of your gain," analyst Portnoy said.

 

Some people question whether the level of expenses is justified by the real overhead of running a fund. Small funds have difficulty keeping their expense percentage low because it is calculated against a small asset base. But big funds enjoy economies of scale: Even a 1 or 2 percent fee will generate millions of dollars.

 

When institutional investors such as large pension funds put their money with a fund company, they either contract for a separately managed account or they are allowed to buy a special class of fund shares that have lower fees than the shares available to individual investors.

 

Naples lawyer Thomas Grady accuses some big fund companies of ripping off retail investors by charging them fees that the big money managers would never agree to pay. He said fund directors, who are supposed to represent the interests of investors, usually go along with whatever the fund management company wants to charge and have no incentive to do otherwise.

 

Grady and Tampa lawyer Guy Burns represent a group of investors who are suing Alliance Capital Management and UBS Asset Management over mutual fund fees in a case pending in federal court in Illinois. They are asking for class-action status.

 

The suit claims Alliance charged its own mutual funds an average of two to three times more than it charged outside clients to invest their money for them. In some cases, the discrepancy was even greater. Alliance charged the Alliance Premier Growth Fund 0.93 percent of assets for investment management while charging an outside client, the Vanguard U.S. Growth Fund, 0.11 percent of assets to invest its money.

 

(Florida's state pension fund was an institutional investor with Alliance, paying 0.165 percent of assets for investment management services that are now the subject of an unrelated lawsuit. The state is accusing Alliance of mismanaging its portfolio by investing heavily in Enron Corp. as the stock was falling.)

 

Alliance declined comment on the Illinois suit. The company's funds are now known as AllianceBernstein.

 

The lawsuit also attacks the fund practice of contracting out investment management for a low fee, then charging shareholders a much higher fee for the service. The suit says Brinson Advisors, which is now part of UBS, contracted with three advisers to manage its PACE Large Company Value Equity Fund, but kept its charge to shareholders the same, pocketing the difference. Brinson kept 0.475 percent of assets, more than twice the fee paid to the advisers who actually managed the money.

 

"We believe this case is without merit," said UBS spokesman Stephan Austen. "It is the funds' boards, the majority of whom are independent directors, who consider and approve these fees. All UBS fees for its funds are well within industry parameters."

 

In fact, the arrangement is not unusual. There's a similar situation at the Heritage Funds, which are managed by Heritage Asset Management, part of Raymond James Financial Inc. in St. Petersburg.

 

Here's one example: Heritage Asset Management charges a management fee of 0.75 percent of assets to shareholders in one of its funds, Heritage Capital Appreciation Trust. Out of that it pays 0.25 percent of assets to Goldman Sachs Asset Management to invest the fund's money. Heritage gets twice as much as Goldman Sachs just to monitor that company's performance and oversee the fund's activities.

 

"We have an oversight function," said Stephanie Brown, vice president of marketing for Heritage. "Goldman Sachs is a contractor to us, but we are responsible."

 

The Heritage fund's shareholders are charged separately for marketing, shareholder servicing, legal and accounting fees and other expenses. Total expenses for investors last year were 1.23 percent or 1.93 percent, depending on the type of fund shares.

 

Industrywide, the average expense ratio is 1.57 percent for stock funds and 1.09 percent for bond funds. However, low-expense funds have attracted more assets. Weighting the numbers by fund size produces an average expense ratio of 0.97 percent for stock funds and 0.74 percent for bond funds.

 

Mutual fund industry supporters say that if you combine sales charges and annual expenses, the total amount fund shareholders pay has declined. But for stock fund shareholders, only the sales charges have gone down, not the annual expenses.

 

The total annual cost for a stock fund has fallen from 2.25 percent of assets per year in 1980 to 1.28 percent in 2001, according to research by the Investment Company Institute, a fund industry group. The institute says those numbers are sales weighted, which means costs for more popular funds are weighted more heavily.

 

The decline is partly due to a big increase in sales of no-load funds, those with no sales charges attached. Investors are buying more of those shares through retirement savings plans such as 401(k)s and through independent investment advisers who charge a separate fee for managing a client's account. Some investors also buy the funds directly from fund companies or through mutual fund supermarkets operated by discount brokers.

 

In addition, broker compensation has changed. Before 1980, brokers who sold funds were paid out of upfront sales charges of as much as 8.5 percent of the investment. Although investors still have the option of buying funds with upfront commissions, typically 4 to 6 percent, shares increasingly are sold without them. Instead, the investor pays higher annual expenses, which funds use to compensate brokers.

 

A big chunk of the broker compensation paid today comes from an optional annual marketing fee known as a distribution fee, or 12b-1 fee.

 

When the Securities and Exchange Commission authorized 12b-1 fees in 1980, the reasoning was that marketing the funds would increase assets, which would lower costs for shareholders. Each year mutual fund directors are required to review the fees and determine that there is "a reasonable likelihood that the distribution plans will benefit the company and its shareholders."

 

Once authorized, 12b-1 fees rarely disappear. A Standard & Poor's study recently found 139 funds that still charged a 12b-1 fee even though they were closed to new investors and presumably would not need to do much marketing. The funds continue to pay brokers who sold the funds in the past.

 

"If a fund is closed to new investors, you still have to compensate the sales person for their services," said Chris Wloszczyna, spokesman for the Investment Company Institute.

 

The SEC has said it wants to review the rule permitting the fees.

 

Lawyer Grady's Illinois lawsuit demands a refund of 12b-1 fees, saying they are unnecessary and have been no benefit to shareholders.

 

Why don't directors object? The suit says fund companies exercise "undue influence" over their directors and fail to keep them fully informed. Directors typically serve on the boards of multiple funds in the same fund family and meetings are brief.

 

Once an investor decides to learn more about mutual fund fees, there's some digging to do. Annual fees do not appear on the monthly or quarterly statements that many investors use to track their fund's performance. However, they are disclosed, along with sales fees, in fund literature such as the prospectus, the legal document given to new investors. Fees also can be found by consulting research services such as Morningstar (www.morningstar.com)

 

Still, some costs are hidden. The published expense numbers do not include trading costs, which can be substantial. Mutual funds buy and sell shares through brokerage firms, often participating in a game known as "soft dollar" arrangements. In exchange for paying inflated commissions, the mutual fund companies earn soft dollars, or credits along the lines of frequent flyer miles. These soft dollars are used by the fund companies to purchase investment research as well as other expenses that could be loosely construed as research, such as computers, software and subscriptions.

 

Supporters of the arrangement say the system pays for research that only the largest money managers would be able to afford otherwise.

 

Critics say shareholders end up footing the bill for costs the management company otherwise would have to pay. In addition, they say inflated commissions sometimes are used as a way of paying a brokerage firm extra to sell a company's funds.

 

Vanguard founder John Bogle and others are calling for a ban on soft dollars, but a more likely outcome is a requirement for disclosure.

 

A bill now pending in the U.S. House of Representatives would require disclosure of transaction costs, soft dollar and revenue sharing arrangements. The bill also calls for the SEC to study the services provided and conflicts of interest created by these arrangements.

 

The Investment Company Institute and SEC Chairman William Donaldson both are on the record favoring disclosure.

 

Investors will remain in the dark until disclosure is required, Morningstar analyst Portnoy said.

 

"I speak to fund managers every day and when I ask "what is your trading cost?' either they don't know or they won't say," he said.

 

But Portnoy said investors can and should pay attention to the information that is available.

 

"An investor can do a lot comparing how much a mutual fund costs relative to others that do basically the same thing," he said. "You don't want to pay two or three times as much for the exact same product."

 

He said that advice is even more important for bond fund investors than it is for stock-fund investors because there is less variation in bond fund returns.

 

"You're not going to find a bond fund with a successful long-term record that has above-average expenses; the two just can't go together over long periods of time," he said. "There are some overpriced equity funds that have done pretty well over time, but if you're playing the averages, you've got to go for the cheaper funds."

 

Portnoy said investors who want financial advice should expect to pay for it, but within limits. Some investors pay an adviser an annual 1 percent asset management fee on top of the expense charges for the mutual funds in their portfolio.

 

"Generally, if you're paying more than 2 percent a year, you're putting yourself at a pretty extreme disadvantage," he said.

 

-Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.

 

The Web site of the Securities and Exchange Commission (www.sec.gov) has a calculator that shows the dollars and cents impact of mutual fund fees over different holding periods. Under "investor information," click on "calculators for investors."

 

 

 

 

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