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s.romero

Annuities, Insurance Companies, Index Funds....all Bad?

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[The information below is in reference to 403B plans with a school district]

 

I have an advisor who recommends products with LSW (Life Insurance Company of the Southwest). They have varying types of products but the advisor has presented the advantages of 403B accounts with indexed annuities. The annuities also have a rider/lifetime income component called a GLIR.

 

Life Insurance Company of the Southwest (LSW) offers an excellent savings and retirement income solution for employees of non-profit organizations. Our Guaranteed 1 Lifetime Income Rider for 403(b) and 457(b) flexible annuities can provide the annuitant with a Guaranteed Withdrawal Payment from his or her annuity that will last a lifetime…income that cannot be outlived!

 

Can someone explain more why people say "don't go with insurance companies" and "ALWAYS stay away from insurance companies." Is there no good option that you can choose through an insurance company/annuity like National Life Group/LSW? Also, the advisor said that the fees are low with indexed accounts, would that be something I would look for?

 

I always see names like Vanguard and Fidelity but why aren't insurance companies a good choice?

 

 

According to this bar graph, it seems index funds with low fees can provide some advantageous growth.

fees_chart.gif

 

 

THANKS FOR YOUR RESPONSES AND HAVE A GREAT DAY!

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Welcome S. Romero

 

We have discussed this topic in such depth that you should have no problem finding answers to your questions if you dig around on this site. I once though annuities were a great idea too for all the reasons you mentioned. But you pay too hefty of a price for them. You are helping the salesman's retirement more than you are your own. You would do better if you invested outside of an annuity in a 403b and going directly into a mutual fund that offers very low cost. It may not seem obvious at first but after a few years you will see your returns lagging in an annuity significantly. The chart you posted came from this site because I have seen it before. It says it all in few words and graphs. Another problem is an Index fund you buy in an annuity will have fees that are way too high and willeffectively kill the advantage of owning an index fund in the first place. The other problem is the advisor. He is selling you a commissioned product. He does not have your best interest in mind. His job is a numbers game. The more he sells the more he will make. Yes he may smile and seem convincing but the way commission sales are set up puts him in the position of looking after himself before looking after you. He is not an advisor really. You may never see him again much after he signs you up. Real advisors who are fee only and not comissioned would never put you into a variable annuity except under specific and special circumstances particular to your needs and certainly not with one affiliated with insurance company. Commisioned advisors sell the same product to everyone and sometimes the wrong product based on the commision they will make. My Financial insurance "advisor" early in my life kept selling me inappropriate products at a time that I I was very naive. Basically he was screwing me under the guise of being a helpful, ethical person. He was anything but.

 

Below is a copy and paste segment from an article that may better explain what I am trying to tell you.

 

 

Here's why variable annuities are problematic:

  • They often charge steep fees and costs. Even seemingly small fees can eat into your return, making a big difference in the long run. A variable annuity is likely to charge you fees for mortality and expense risk, along with general administrative fees. In addition to that, the securities you elect to invest your annuity money in, such as mutual funds, will charge fees of their own. Taken together, these fees add up and reduce the appeal of a variable annuity over other alternatives. Annuity expert Stan Haithcock has found the average total deferred variable annuity fee to be 3%, which can take a big bite out of your overall returns.
  • Variable annuities charge "surrender" fees, too, which can be substantial. If you want to withdraw money within the first few years, you'll be socked with a surrender fee of, typically, between 5% and 7%. It will be gradually reduced over about five to seven years. Along with that, there's also a 10% tax penalty that applies to withdrawals made before age 59-1/2. (This penalty applies to other retirement accounts, too, such as 401(k)s charge.)

Another danger to be aware of is one that applies to all annuities: If the insurance company behind the annuity you buy goes under, you're not likely to receive all the money you expected. Thus, it's important to buy from high-quality, highly rated insurers.

Think carefully and weigh your options
Variable annuities present enough risk to investors that the Securities and Exchange Commission (SEC) offers explicit warnings, noting: "Other investment vehicles, such as IRAs and employer-sponsored 401(k)or 403b plans, also may provide you with tax-deferred growth and other tax advantages. For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 403(b) plans before investing in a variable annuity."

I hope this helps

 

Tony

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s.romero:

 

i'm glad you posted at this board. Others here are more knowledgeable than I (I'm a teacher, not a financial professional), but I'll give it a try and I invite corrections if I get any of this wrong.

 

You are correct that pretty much everyone who has looked into 403b accounts will warn you away from insurance companies. Here are some reasons why.

 

1. Your advisor is not a trained financial planner who is working in your best interest. He or she is an insurance sales rep. May well be suggesting the best among the products the insurance company offers, but that is hardly the same as finding you the best available arrangement, independent of companies (and, most probably, a sales commission for him or her).

 

2. Insurance annuities, even the best of them, are rarely appropriate in a 403b account. One of the main advantages to such annuities is that they allow earnings to build up tax deferred. Investments held in a traditional 403b account are already tax deferred, so you will be paying a premium for no benefit. Plus, if you are expecting a pension, that will provide lifetime payments in the manner of an annuity, so there is a real question about whether an annuity is an appropriate supplementary investment choice (as opposed to, say, low-cost stock and bond index funds). A fiduciary financial planner could help you figure this out based on your circumstances, but we already know that the insurance salesperson will try to sell you an insurance product, regardless of your best interest.

 

3. Fees. Insurance company products are notoriously layered with fees and expenses that are not at all transparent. The salesperson probably gets a commission, which can be a big chunk of your money taken right off the top. Of course the salesperson will say the words "low fees," but if you dig into you are likely to find costs that wildly exceed those offered by other investment vehicles. Look around the internet for "John Bogle"--he is very clear on the importance of fees to an investor's results, and there are lots of essays and video interviews with him around.

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I'm glad you posted at this board. Others here are more knowledgeable than I (I'm a teacher, not a financial professional), but I'll give it a try and I invite corrections if I get any of this wrong.

 

Whyme,

 

Stop selling yourself short. You have always been very competent in your answers.

 

Tony

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I'm glad you posted at this board. Others here are more knowledgeable than I (I'm a teacher, not a financial professional), but I'll give it a try and I invite corrections if I get any of this wrong.

 

Whyme,

 

Stop selling yourself short. You have always been very competent in your answers.

 

Tony

 

 

Thanks, Tony. I do my best, but I want to be circumspect about offering financial advice in areas with which I'm not super-familiar. I've never purchased an annuity product and experienced their problems first-hand, though I have heard from those salespeople... Your reply was posted while I was still typing mine--I hope the consistency of our responses will help convince the original poster to look more deeply into available options before saying yes to this "advisor."

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S . Romero

 

 

 

 

So low cost mutual fund may be the best option for a long term investment (20-30 years)?

 

Absolutely!!!

 

 

If you post the choices your school district offers, we can help you pick your best options.

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I'm an educator in Texas . HS Teacher. So low cost mutual fund may be the best option for a long term investment (20-30 years)?

 

Most academic analysis concludes that broadly diversified low-cost index funds are the best option, and the most important decision that bears on your long-term results in the split between stocks and bonds (stocks are very volatile, but over time they tend to produce higher returns). Which is why you hear so much about Vanguard, they are very good at offering such funds. But it's tricky with 403b accounts: you need to identify an "approved" provider that offers index funds at a reasonable cost. If your plan includes Vanguard, pick that. If not (which is more likely), look for Fidelity direct or TIAA-CREF. (You'll need to be careful, though, those providers have some high-cost options mixed in with the low-cost ones.) Does the state of Texas offer something to 403b participants? If so, that'd be worth looking into, some state-sponsored plans are among the best offerings.

 

If you're willing to read a bit on this, I'd suggest Bogle's "Little Book..." or the "Bogleheads" book on retirement planning.

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Whyme

 

The fact that you never purchased an annuity makes you smarter than me. But we are really in sync today. I see you just posted too again.

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S. Romero: I just looked at this list from the Teacher Retirement System of Texas: http://www.trs.state.tx.us/global.jsp?page_id=/403b/certified_list

 

The question is, does your district offer all of those options? If so, you're in good shape. They include Vanguard. Another interesting option listed there is Dimensional funds (we can talk about the differences if they really are available). If you can go with either of those, you'll have a first-rate plan.

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Hi S. romero,

Welcome to the boards. Just to add my 2 cents about annuities:

Annuities have at least four problems

 

1. Insurance products carry costly guarantees. Thus, the educator will not earn average stock and bond market returns. But our teachers' pension plans, foundations, and higher education endowments do earn the stock market averages because those institutions invest in stocks and bonds. We are simply saying that if its good enough for our pension plans to invest in stocks and bonds, why not for us too. Pension plans would NEVER purchase annuities because they could not provide the level of benefits we now receive. Most financial advisers (and pension plans) with fiduciary responsibility will inform their clients that equity exposure (stocks) with low-cost investments has been the primary way nest eggs will keep or beat the inflation rate. That's the primary reason why my pension benefit is higher than Social Security.

 

2. Annuities are not an investment, they are a contract with an insurance company and the credit you get is decided by the insurance company, NEVER by the stock market. Sales people make all kinds of claims that mean absolutley nothing. Why? Because they can. There is no protection from the regulations, the unions, employers or benefits departments for public k12 educators 403b plans. NONE!

 

3. Annuities are not diversified. Even if a teacher has three annuities with three different insurance companies, said teacher is not diversified as defined by most fee-only fiduciary financial advisers. Besides, insurance companies have declared bankruptcy, too. The most famous bankruptcy was the huge American International Group (AIG) in 2008. Our investment advisory committee had firsthand experience with AIG. Many educators voiced their concerns about their money and rightly so. No teacher lost money this time. The point is that no matter where one's money is invested, there is no 100% safety as often claimed by insurance agents. And as whyme said, insurance agents are NOT trained investment advisers.

 

4. Aren't agents self-serving by only informing and selling the commission-ladened products? Educators have little chance to ask questions about other options and are often sitting ducks because the district or union offers little or no access to objective information. The "2nd opinion" does not exist. For example, I asked about using my 403(b) in mutual funds and was blindsided by her conflict-of-interest and knee-jerk reaction: "I never recommend mutual funds to teachers because they are too risky!" That barbarous comment marked the last time I ever talked to an insurance agent, over 20 years ago.

 

regards,

Steve

Retired LAUSD elementary teacher

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Welcome S. romero,

 

It's good to critically look at all choices including index funds and well regarded firms like Fidelity, TIAA-CREF, T. Rowe Price and Vanguard. As the terrific board members have illustrated the preponderance of evidence supports a low cost, diversified index approach to investing. It has worked in my life (24 years largely using this approach).

 

The LSW person is a sales person. S/he is paid to sell product. I highly doubt this person invests in the products they are recommending. You should ask this question. Ask to see their total portfolio as they may have a minor stake so s/he can say I too am an "investor."

 

We recommend you only explore using a CFP. These financial professionals MUST adhere to the fiduciary standard. Here's how you can check to see if the person you want to work with is a CFP http://www.cfp.net/utility/verify-an-individual-s-cfp-certification-and-background

 

Good luck and stay in touch!

 

Dan Otter

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Dan

 

Just to be clear, the guys that sold me annuities and inappropriate commissioned products had the CFP designation and worked for insurance outfits so the fact they have that designation does not alone make them a safe bet. Having them sign a fiduciary pledge though puts them on notice that you are smarter than the average bear.

 

Also I wonder if all folks getting the CFP designation face the same standard coursework /testing standards. I worry that certain organizations might be able to finagle abbreviated CFP preparation for its employees just so they claim its employees are certified.

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