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Dan Otter

Rebuttal To: "do Annuities Makes Sense?"

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Those who receive the bWise Alert Email Newsletter will have received this yesterday. For the rest of you here's the info on an important story that was posted on the 403(b)wise home page today.

 

Rebuttal to: "Do Annuities Makes Sense Inside a 403(b) or 457(b)?"

Ellie Lowder, MCRS, a veteran independent consultant in the 403(b) market segment rebuts several points made in a story questioning the use of annuity products. [403(b)wise]

 

http://www.403bwise.com/wisemoves/annuities_el.html

 

Dan Otter

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Ellie Lowder is the Technical Advisor to the National Tax Sheltered Accounts Association (NTSAA). This is an industry trade group comprised mainly of life insurance companies. How many of you know that the NTSAA in its original form was the National Tax Sheltered Annuity Association?

 

Peace,

Joel

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Hi Joel,

I remember when they changed their name. It was to counter the bad press of expensive inappropriate annuities that were always sold but not bought.

 

You can change the dress on a pig, but its still a pig.

 

This article is absolutely no surprise to most of us here. It is the same tune that has been played for decades--Boring!

 

I wonder how many sales people have their money (not the company's match) but only their own money in the expensive annuity products they sell to teachers.

 

best wishes,

Steve

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Ellie Lowder is the Technical Advisor to the National Tax Sheltered Accounts Association (NTSAA). This is an industry trade group comprised mainly of life insurance companies. How many of you know that the NTSAA in its original form was the National Tax Sheltered Annuity Association?

 

Peace,

Joel

 

Funny. The proprietors of this website describe her as an "independent consultant." I suppose Dan Otter is part of this vast conspiracy of annuity hucksters now?

 

The NTSAA is also a non-profit entity, Joel, but given your poor grasp of non-profits, I doubt that'll mean anything to you.

 

 

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So far I've seen two replies to the original post here (besides my own). They question the integrity of NTSAA, and of Ellie Lowder, but they don't refute a single thing she says in her rebuttal. Why is that?

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Ms. Lowder did not take much space to make her rebuttal, so probably not fair to judge her arguements too harshly. However, I did find them to be rather ineffective - at least in convincing me that a variable annuity would be a better option than a custodial account. Would have been nice if she had actually included some numbers showing why the the 'benefits' one can receive from a variable annuity actually justifies the high costs.

If variable annuities would do away with surrender charges they would be a lot more attractive. Also, if the M&E charges were made optional. Then I might be persuaded to actually see some value in va's.

 

Hal

 

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So far I've seen two replies to the original post here (besides my own). They question the integrity of NTSAA, and of Ellie Lowder, but they don't refute a single thing she says in her rebuttal. Why is that?

 

I think it would be difficult to actually refute much of what she wrote because it was so vague. She makes a lot of statements referring to people ''feeling better' or 'thinking' that their choice is a good one, but not much hard data to back it up.

She does mention the recent losses in the stock market to demonstrate how the M&E charges are of value. If someone had started investing in their variable annuity plan a short time before those losses, I could see some validity in that example, but then you'd also have to assume the person was rather young and not likely to die. Also, the actual amount invested would be relatively low. However, if someone had been investing for 20 to 30 years they probably still would have made some money on their investments even if they did have the misfortune to die when the market fell to its lowest value.

 

Hal

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EL for obvious reasons is a big fan of the 403b annuity. Besides the desire to have personal service she tells us another major reason to use the annuity for 403b investing is the guaranteed payout options over one's life. But then she dismisses that benefit by telling us she is against annuitizing. So I ask EL: if it should cost no more than one to ten basis points for the return-of-premium death benefit and you do not advise one to annuitize how could you in good conscious recommend variable annuities for 403(b) investing when the average insurance company charges 75-125 basis points for insurance related benefits (M & E).

 

 

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I took a look at the NSTAA site and all of the directors are in the insurance or insurance agency business. EL appears to be a paid consultant/advisor to NSTAA. It also appears EL provides additional services for the Agent marketplace. Finally, the CMRS (Certified Master Retirement Specialist) credential that EL carries is bestowed by the NSTAA through their continuing education program.

 

This site - 403bwise - has a responsibility to more fully disclose this kind of information so people can judge how credible an "independent" argument is.

 

I am sure EL is professional and an expert in the 403(b) marketplace. EL does not appear to be independent at all. If there are facts to the contrary to support that position, I would expect them to be posted in this thread.

 

I see no need to rebut what EL has said. Her points are valid. Comparing VA to no-load mutual funds is non-sense, they are entirely different instruments with different pricing, and different elements of value.

 

Disclosure and choice are the issues.

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Hi,

"The reason that annuities are prevalent in the 403(b) marketplace is that they fill certain needs that mutual funds do not." stated EL

 

The reason that annuities are prevalent in the 403(b) marketplace is that they fill the certain needs of the insurance company: cash cow.

 

A couple of teachers at my school signed up with Metlife. Neither of them knew that they had surrender fees that lasted eight years. A little detail the rep(shark) fail to inform them. I managed to get one of them to drop Metlife and take her money somewhere else. These guys don't look out for their clients. They look out for themselves. Best Wishes.

 

Joe

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I have long been an activist against using variable annuities in 403bs. However there are a couple of points I would like to make. First, under todays rules a client must sign a form spelling out all the charges that are in a variable annuity. So to claim that you did not know that they had these charges means you have signed paperwork that you did not read. Which is always a truly foolish thing to do. And for that you have no one to blame but YOURSELF!

 

Second there are some very good variable annuities out there today with some very real benefits. That as long as a person understands the cost associated with the benefits are a vaible option.

 

I am not saying that for the vast majority of people that variable annutities make sense, they do not. It is time to stop attacking the product and instead do what this site does best, which is to educate the consumer what the true costs and benefits are. What would be a lot more useful is if this site would do a study so that you could truly rate these products and not just out of hand condem them.

 

Bill Mahoney

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Bill,

Hello and here we go again. After all these years, a LOT of other folks and I will disagree with you about VA in tax deferred money. Sure its so easy to blame the victim for not reading the fine print. It is hogwash about agents required to have clients sign a something that they understand the costs. You have got to be kidding. Here’s why: it may be on the books, but out here in California, nobody talks about this in public so who is to know. I seriously doubt that this policy is enforced anywhere. Who is going to enforce it? NOBODY is watching these sharks at the union halls and school cafeterias. When districts and unions start monitoring these people, then what you say may be valid. Teachers are pragmatic people, if the fees are explained fully and clearly to them, they might, just might seek a lower cost alternative.

As long as there are some educators contributing to this site, it will never be a patsy to an inappropriate and expensive 403b products. Even the SEC report (2000) will agree that its inappropriate for tax deferred money. The ONLY thing annuities are good for is for wealthy people with lots of after tax cash, not us poor teachers trying to get a fair chance in the 403b world.

If what you say that variable annuities are not appropriate for the majority of people (which I agree), how do you explain that 80% of the $550 billion 403b market is already in fixed and variable annuities. Apparently, it's not just the majority who are currently in these worthless products, it’s the vast majority. As an "activist" I am sure you are upset. But, you will not condemn them. You always find ways to support them. Since you will not do it, thats where we educators come in. Now you might know why we "out of hand condemn them." Its very simple; we want to increase that 20% so that educators have a fair chance for a comfortable retirement.

Steve

 

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Steve,

 

First it is not fine print, it is a seperate form and it is mandated by the SEC and NASD. And they will enforce it as well as the broker dealer the rep works for. If any person has purchased a variable annuity in the last few years and did not sign this form they can easily get out of the contract with no surrender penalties involved. Also the broker dealer that allowed the transaction will be heavily fined by the NASD and SEC.

 

Second, as I said the vast majority of people do not belong in variable annuities. In fact the statement that people that are really rich are the only ones that should use them is bull. For a variable life product is a much better choice taxwise for these people. Then a variable annuity ever would be.

 

Third, as I stated and have been stating for far longer then anyone on these boards the vast majority of people do not belong in any type of an annuity inside a qualified plan. However, there are times when a person who is making an informed decision on the cost and benefits should use them. We both agree that people would be better off not using these products. However, for some there are advantages for using them. Some of the living benefits offered such as quaranteed values for income make sense if the client is nearing retirement and are so concerned with what a negative market would do to their potential income from their 403b account, that they would take all their money out of the stock markets because of that fear. With this benefit a lot of these people will keep their money in the markets, instead of being in fixed income investments. Yes, it will cost them more then using a solid mutual fund with low expenses, but no where near as much as being totally out of the market would. And these benefits are real, so real that some of the companies that offered and so mispriced them on the low side it has driven them out of the business. It has also driven down the financial ratings for other firms.

 

You are right I will not condemn a product. It would be like condeming all hammers in the world because some carpenters use them instead of a screw driver when they are using screws. About the only financial product I totally condemn are the old two tier annuities, they have absolutely no redeeming features at all. What I do condem is the misuse of these products. I will condem the people and firms that do so. What I will condem are unions that do not use their postion and muscle to get their members better options. I have approached a few state unions about setting up a salary slot that would allow their members to use any no load mutual fund they wish, and they would not even listen. What I will condem are financial sales people that put all or the vast majority of their clients into these products. What I will condem are the companies that do so as well.

 

Steve I am a fee based advisor who cannot use the vast majority of these products in my practice because I am a Registered Investment Advisor and not a registered rep. So when the few times I thought it was apporiate for a client to use them, I have had to refer these clients to reg reps I know, and when I do it costs me money to do so. So there must be a proper place for these products if I am willing to give up income to have my clients use them.

 

I will also disagree with you that the vast majority of teachers are financially pragmatic people. If they were they would not be teachers, because we greatly under pay our teachers in this country. Also I have offered many seminars for free at differant local school systems on 403b's, and have yet to have more then a handful of teachers take the time to attend one. The people that do are the same type of people that come to a site like this. I also have to ask where are the teachers when it comes to their unions. Unlike a school board where they have little to no say, they have a direct say in their unions. Where are the activists to start fighting for this issue inside them. Why are the activists not running for election at their local unions so they could change how unions are handling this issue? All it would take is the union to start backing a solid plan that offers no load options or low cost load options for members that want a financial pro to help them with their investment choices. However, to do so would cost the unions money instead of making them money.

 

Bill Mahoney

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When I sat down to talk to the Valic rep, he said that one of the main reasons for using his product was that Valic really wanted to make it easy for investors to have access to their money and be able to transfer it to other vendors. That Valic "only" would charge me a 5% surrender fee! Of course I could always transfer a whole 10% annually with no charge. I had trouble keeping a straight face.

 

Hal

 

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