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Dan Otter

How Valuable Is The M&e?

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Hi TR1982,

 

I totally agree with you. I urge all posters on this M&E thread to stick to the topic at hand and not resort to bashing any idealogy, individual or profession. This board will become very boring very quickly if only one point of view is represented. I for one believe there is a lot to learn from the views of others.

 

Dan Otter

 

 

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Now to the topic M & E. I have come to believe that the vast majority (90% of the total M&E) of this cost factor is Expense related to recovering commissions the carrier paid to an agent or a broker. I have come to this conclusion through discussions with actuaries who construct the products and also from intuition. My intuition tells me that the amount of risk born by the carrier is relatively small (and hence so too should be the mortality cost). Further evidence is that I have never heard of an underwriting process connected with an annuity, yet I have frequently seen life insurance (term & whole life) that involves lengthy underwriting and sometimes requires a medical exam of the insured.

 

I do not begrudge agents or brokers their commissions, so long as they are disclosed.

 

The fact that we have to even wonder about how the M & E is allocated is in itself testimony to the need for greater disclosure in the annuity/insurance industry. By the way, mutual funds could disclose more & better information too.

 

Cheers,

 

Danc

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Guest TR1982

Well FT and others,

I have decided to take your advice and post my opinion on this issue regardless of how others my chose to characterize me.

 

Let me make clear a couple of things first:

 

1) As you all know by now, I am not Deep Throat. Fortunately, he is much older than I am.

 

2) I am not responding in defense of the M&E. I am simply giving my view of why it exists and what it's purpose is.

 

3) I do not know what the breakdown of the various expense components of the M&E are. I personally don't think it matters. My view is that if you think it's to much, don't buy it.

 

I would suggest that you read the prospectus of a VA. You would be surprised at the language that describes the M&E. Clearly, there is some cost for the insurance aspect of this fee. I am not going to debate whether term life insurance would be better or cheaper. I don't think you can make a generalization about that since the costs would be very different for a 25 year old versus a 50 year old. The insurance is there in the contract, some people might want it, others might not.

 

The bigger issue is the "E" in M&E. The reality of VA contracts is that insurance companies have figured out what it costs to bring this kind of product to market and distribute and maintain it. That will cost somewhere between 100 and 125 basis points (1.00-1.25%) annually. Is that fair or reasonable? Compared to what? I don't know. I do know this: most financial advisors who manage money for clients are going to charge somewhere between 100 and 200 basis points. Is that fair? I don't know.

 

In the mutual fund industry there is something called a "C" share. The expense ratio on the fund is a lot higher than an "A" share since there is no upfront sales charge. If you look at C shares and annuity fund options, there is not a lot of difference. The point is, there is a cost to distribute and maintain the investment product. This is true whether it's an annuity or mutual fund.

 

Would transparency be better for this expense? In a perfect world, yes. I personally would prefer it. But one of the problems with this is that higher balance customers are paying some of the freight for lower balance customers. If that system didn't exist, all the low paid, low income people would never get into these plans because no one would have any incentive to work with them. That's why when you examine large corporate 401k plans probably 80% of the participation and contributions come from the higher earners. Vanguard doesn't want those lower paid people to enroll. Those people cost them money and eat into their profitability.

 

Frankly, I think transparency would ultimately be better. But there will be a cost. The lower the investment costs, the less money is there for distribution costs. So for those who do educate themselves, they will get a better deal. Unfortunately, most people will not, so in the end they will lose out because they will not save at all.

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From TR: "The bigger issue is the "E" in M&E. The reality of VA contracts is that insurance companies have figured out what it costs to bring this kind of product to market and distribute and maintain it. That will cost somewhere between 100 and 125 basis points (1.00-1.25%) annually. Is that fair or reasonable? Compared to what? I don't know. I do know this: most financial advisors who manage money for clients are going to charge somewhere between 100 and 200 basis points. Is that fair? I don't know."

 

From danc: "I have come to believe that the vast majority (90% of the total M&E) of this cost factor is Expense related to recovering commissions the carrier paid to an agent or a broker. I have come to this conclusion through discussions with actuaries who construct the products and also from intuition. My intuition tells me that the amount of risk born by the carrier is relatively small (and hence so too should be the mortality cost). Further evidence is that I have never heard of an underwriting process connected with an annuity, yet I have frequently seen life insurance (term & whole life) that involves lengthy underwriting and sometimes requires a medical exam of the insured."

 

Taking these two opinions into account, I can look at the VA that I own, which has 100 basis points of M&E, and compare it to TIAA-CREF's product, which has been said to have an M&E of 3 basis points. If the main difference between my carrier and TIAA-CREF is the presence of an agent, then it's realistic to assume that the agent is taking in somewhere in the neighborhood of 90-95 basis points, or just under 1%, with the remainder covering insurance costs (or "M").

 

So the real question is, does the advisor with whom you're working earn that amount of money? For me, the answer is yes. For those who have agents/advisors from whom they receive insufficient support or advice, the answer may vary. And from the point of view of the agent (not to put words in your mouth in particular, TR), the question has to be, what am I doing to earn that amount of money? Good, ethical agents will be able to answer that question without batting an eye. Less reputable agents, of course (much like less reputable members of any profession), will have a much harder time justifying how they earn their keep.

 

 

 

 

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Guest TR1982

"If the main difference between my carrier and TIAA-CREF is the presence of an agent, then it's realistic to assume that the agent is taking in somewhere in the neighborhood of 90-95 basis points, or just under 1%, with the remainder covering insurance costs (or "M")."

 

FT,

The firm is charging this to the contract holder. Do not assume all those dollars are going to the advisor. In fact, most assuredly, they are not.

 

My bigger point is this and you hit on it, FT: Investors who want some form of advice and/or service, can pay for it through this kind of expense charge. Given what most investment firms in the industry charge, I think it's pretty fair.

 

Example: Teacher contributes $1200 per year at a total cost of 2%. He is paying $24 annually for every $1200 he has in the account. For that, he gets access to 25-50 funds that he can build a fairly diverse portfolio with. Would a no load fund company be cheaper? Of course. But he couldn't diversfy beyond one fund for quite a while and would not get any advice.

 

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Guest Sierra

And the ME fee for the fixed annuity lacks all transparency whatsoever. We just know it is deducted before the fixed interest rate is declared. Should not the fixed annuity holder know what it is in bp terms?

 

Joel

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To answer one of the questions... most of the M&E goes to pay commission in the early years of a 403b contract, after the first few years the M&E pays for the insurance co's expenses (marketing, etc.) and profits. Very little of it is actually used to cover investment loses of deceased teachers.

 

Everyone should keep in mind that TOTAL expenses of a 403b is what is important in combination with investment performance. In other words, it is O.K. to pay 1.5% in expenses (including a 1% M&E fee) IF the investment performance of the funds within the 403b is usually better than the performance within a 403b with lower costs (TIAA-CREF).

 

I am a public high school teacher AND also a financial planner, so I think I understand the issues involving 403b's pretty well. Bottom line... M&E expenses are acceptable in the right situation.

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Sierra,

 

There is usually no M&E costs (or other costs) associated with a fixed annuity product. The insurance co. may be paying you 3%. They take your money and invest it to make a profit. It's similar to a bank savings acct.

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Guest Sierra
It has been estimated that Mortality & Expense (M&E) fees average approximately 1.25%. How valuable is the insurance protection of the M&E? Supporters say that it provides valuable protection to heirs in case of premature death during a down market. Detractors say participants would be much better served purchasing low-cost term life insurance and investing in low-cost investments.

 

Secondary question: It has been reported that much of the M&E expense goes for commissions. Would sellers of products with an M&E component benefit from more transparency? Meaning: why not break up the M&E into a separate "M" fee for the death benefit component, and a separate "E" fee for the commission and expense cost?

 

Dan Otter

 

 

Mortality and Expense Charges (From Motley Fool)

The first fee typically imposed by an annuity will be what's known in the industry as a "mortality and expense" (M&E) charge. This fee pays for the insurance guarantee, commissions, selling, and administrative expenses of the contract. In general, these fees in a variable annuity will be charged as a percentage of the average value of the investment and will probably be quoted in terms of "basis points." A basis point is 1/100th of 1%. Thus, an M&E charge of 115 basis points means a fee of 1.15% will be assessed against the value of the investment. According to the National Association of Variable Annuities (NAVA), the industry average M&E in 1997 was 1.15%.

 

In a fixed annuity, these charges are usually incorporated in the insurance company's determination of the periodic interest rate or the annuity payment amount during the distribution phase.

Chad: Your position as far a the ME fee and fixed annuities is concerned is at odds with the Motley Fool position. How come?

 

Joel

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Guest Sierra

Bottom line... M&E expenses are acceptable in the right situation.

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

Please give an example or two.

 

Joel

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Guest TR1982

"Chad: Your position as far a the ME fee and fixed annuities is concerned is at odds with the Motley Fool position. How come?

 

Joel"

 

Chad,

Don't do it. Sierra wants to drag you into a debate about whether a fixed annuity has an M&E charge. He will never concede this point with you.

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Guest Sierra

In a fixed annuity, these charges are usually incorporated in the insurance company's determination of the periodic interest rate or the annuity payment amount during the distribution phase.

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

TR: It is you who will never concede the obvious point that the fixed annuity is subject to the ME fee. Based on this industry definition that Motley has posted let me give you an elementary example: Assume a declared interest rate of 5 percent and 50 bp points for a ME fee, if their was no "incorporation" of the 50 bp (in other words no ME fee) the declared interest rate would be 5.5 percent. Additionally, during the "distribution phase" the annuity income would be higher by 50 bp. So if the annuity income rate is 0.08 it would be 0.085 if there was no "incorporation" of the 0.50 ME fee in the annuity payment rate. WHY IS THIS SO DIFFICULT FOR YOU TO UNDERSTAND? FT: Do you care to back me up on this?

 

Peace and hope,

Joel

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Guest Sierra
Sierra,

 

There is usually no M&E costs (or other costs) associated with a fixed annuity product. The insurance co. may be paying you 3%. They take your money and invest it to make a profit. It's similar to a bank savings acct.

Is not the expenses of running the bank "incorporated" into the bank's declared interest rate. So if the bank, for example, did pay rent would not the declared interest rate be somewhat higher? If you agree with me on this then logic demands that you concede that fixed annuities are subject to the ME fee.

 

Peace and Hope,

Joel

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In a fixed annuity, these charges are usually incorporated in the insurance company's determination of the periodic interest rate or the annuity payment amount during the distribution phase.

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

TR: It is you who will never concede the obvious point that the fixed annuity is subject to the ME fee. Based on this industry definition that Motley has posted let me give you an elementary example: Assume a declared interest rate of 5 percent and 50 bp points for a ME fee, if their was no "incorporation" of the 50 bp (in other words no ME fee) the declared interest rate would be 5.5 percent. Additionally, during the "distribution phase" the annuity income would be higher by 50 bp. So if the annuity income rate is 0.08 it would be 0.085 if there was no "incorporation" of the 0.50 ME fee in the annuity payment rate. WHY IS THIS SO DIFFICULT FOR YOU TO UNDERSTAND? FT: Do you care to back me up on this?

 

Peace and hope,

Joel

 

Joel, I don't have a dog in this fight, so I'm indifferent as to who's right or wrong; but it is important that whatever is said here is accurate. To that end, I doubt that something called "Motley Fool" should stand as the final arbiter of right or wrong.

 

Isn't this as simple as reading the prospectus of a fixed annuity? I mean, if they are charging an M&E fee, by law it has to be disclosed there, right?

 

There are probably a thousand different fixed annuities, so checking one or even one dozen prospectuses won't yield us a final answer. But if in general there is an M&E fee in a fixed annuity, surely we will find it in the prospectus.

 

I don't own a fixed annuity, hence I have no prospectus. Could someone who owns one or who sells them consult a prospectus and let us know what you find?

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