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Dan Otter

How Valuable Is The M&e?

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Brief postscript: I googled the words "M&E fee in a fixed annuity" and then "M&E fees in fixed annuities." Of the hundreds of replies that came up, ALL of the entries that I clicked on attached M&E fees to variable annuities, but none mentioned them in conjunction with a fixed annuity. This is by no means a definitive answer to the question, but the preponderance of evidence so far suggests that M&E fees are not part and parcel of a typical fixed annuity.

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Guest TR1982

Just so the rest of you don't have to relive this painful dialogue with Sierra, here is a copy from a previous thread of what he wanted me to do to verfy that there is an M&E in a fixed annuity:

 

"FT: Please post for us the intelligence exhibited by TR in my discussion with him/her concerning the ME fee and its application to fixed annuities.

 

Joel

 

Sierra,

 

Since I acknowleged to you that you were right on the M&E issue, I don't understand why you are now criticizing me!

 

Secondly, I took your sage advice and emailed one of the top actuaries at Genworth (formerly GE Financial Services) which is one of the largest producers of fixed and variable annuities in the world and I asked him your question:

 

"Is there a specific mortality & expense fee in a fixed annuity offered by Genworth? I don't believe there is an M&E fee on a fixed annuity but I am trying to verify from an actuary who works with these products."

 

This is his response:

 

"Fixed annuities (non-variable)do not have M&E's or mortality expenses applied against the contracts. They are simply the premium accumulated with interest and adjusted for withdrawals."

 

Now, I am certain you will come back and suggest that he is biased, or ignorant, or unqualified, or some other reason that the answer I received was not correct. If that's the case, I suggest that we just drop this since there is no answer that will satisfy you except the one you already have. Also, please stop criticizing my intelligence since I did exactly what you asked me to do."

 

Sierra requested that I go and ask an actuary whether there is an M&E in a fixed annuity. The actuary he consulted does not work for a firm that produces fixed annuities. The one I consulted does. He verified that there is no M&E in a fixed annuity. Now, since Sierra required that I go to a reputable actuary to back up his assertion, and I did, and that actuary backed up what I said, I conclude that every actuary in the world could disagree with Sierra and he would not concede the point. Even now he has gone away from his actuary to the Motley Fool. This is just gamesmanship and a waste of time.

 

Have a good night.

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Sierra,

 

First off, I'm not a fan of M&E and suggest to my teacher friends to avoid it in their VARIABLE annuity 403b accounts as a general rule. The higher the M&E the worse the product in my opinion. Pacific Life has a 403b plan with a M&E of 1.4% PLUS other fees ...ouch!

 

In regards to the Fixed annuities, there is no M&E. I usually agree with guys who wear funny hats, but... In a fixed annuity a person cannot lose money. They are guaranteed a minimum rate (maybe 1.5%), so their account value will always be more than their contributions. If the teacher dies, the value cannot be less than what they put in, therefore there would NEVER be an insurance pay-out. If an Insurance co. was charging a mortality fee knowing that they would never need to pay-out a claim the State Dept. of Insurance would close them down for fraud (at least in California). If you ever find a fixed annuity that charges an M&E alert the authorities (and let me know).

 

 

 

 

 

 

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Here's a situation that would support having a 403b plan WITH M&E;

 

A friend of mine has a moderatly high risk tolerance, meaning that he is looking for a little higher than average stock market returns of growth in his portfolio. However, he wants somewhat CONSISTANT returns. This rules out investing in Emerging Market funds and funds that have a large percentage of "small cap" stocks. He also wants some (20-30%) of his portfolio to be "socially responsible" and at least 15% of the portfolio to be in non-U.S. companies . He doesn't mind having a portfolio of funds that contain 85-90% stocks (he's 34 years old). Like everyone else, he is concerned with expenses. He will be investing $500/month.

 

I told him he was asking for a miracle, but I'd try to put together a plan for him.

 

First I used the TIAA-CREF 403b plan because its a great product. I decided to divide the TIAA portfolio into equal 25% portions, using 4 funds (Global Equity Fund, Stock Fund, Growth Fund, and Social Choice fund). Here's the results (using Morningstar); A portfolio with a low expense ratio of .42% and a 10-year (long term) annualized 7.96% rate of return. This portfolio contains 86% stocks and 14% cash and bonds.

 

I like this portfolio, however, I would rather have a 403b with more variety of funds (different fund companies) and a higher rate of return (after expenses of course).

 

By using Lincoln National Life's 403b I was able to accomplish this! I came up with a similar portfolio (88% stocks and 11% cash and bonds with a similar level of risk) by using 5 funds within Lincoln's Multi-Fund Select variable annuity product. The funds are American Funds Growth and Income fund (25%), Amer. Funds Growth Fund (12.5%), Fidelity Contrafund (12.5%), Lincoln Social Awareness fund (25%), and Amer. Funds International fund (25%). Here's the Morningstar results; an expense ratio of 1.71% (including a M&E of 1%) and a 10-year annualized 9.99% rate of return NET of fees!

 

A 2.03% improvement in total return per year! That equals over $200 more/year in an account with a value of $10,000 even after the higher expenses. You get what you pay for (at least in this case). This doesn't guarentee it will always do better, but the long term track records make me comfortable in paying the 1.71%.

 

If anyone would like the stats (expenses, returns) on the individual funds listed above let me know.

 

Chad

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Chad,

 

Your example may or may not make sense - it depends on the district and whats available...however your point basically is that you get what you pay for and that is not backed up by reality. TIAA is not exactly the best example to use for the equity category of low cost funds because they haven't provided enough options to be diversified. If you wanted to compare low-cost options versus high cost options you would find that the M & E does not add value, it can't (in terms of performance).

 

Now, if we are talking about a district that has two options, one is TIAA and the other Lincoln, perhaps the lincoln policy will outperform despite it's high fees during some time periods, though it is probably unlikely over long time periods, though the fluctuation may be less and it could benefit by having an allocation to small and emerging markets which have a higher return potential (historically) speaking.

 

But there are no studies that I have seen that show that the higher the fee the better the performance. The lowest cost option may not have the best performance either, but on average lower fees funds perform better.

 

ScottyD

 

 

As for my opinion on the M & E - it's a waste. The vast majority goes to pay commissions, not a death benefit. The death benefit is fairly worthless in my own opinion, if it was important to somebody they still shouldn't be willing to pay 5 - 10 times the actual cost of it just for the pleasure of having a DB. The real cost of the DB is the the full M & E fee because you can't separate the Mortality fee out (unless you goto Vanguard) - if you want the mortality protection you must pay a commission to get it, thus you overpay for the DB benefit. If you want additional services and understand how they are being paid for and how it WILL affect your returns than it is your choice - this is America - if you want to pay higher costs it is your right.

 

 

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Scotty,

 

Some good points. I also think the death benefit is a waste (unless a person is taking alot of risk in their portfolio and they think they might die soon). Any fees you pay on investments cannot add to performance, that's for sure. The fees however can pay for added options and service. If you don't get desirable options (like the ability to invest in the Fidelity Contrafund AND the American Funds Growth fund in the same 403b plan) and/or good service from an advisor, of course you should go for the lowest cost option. I buy my ties and shoes at Nordstrom's instead of Macy's. I know I could buy ties and shoes of similar quality at Macy's for a few bucks less, but I always get great service at Nordstrom's, the sales women are cute and I never get hassled when I make returns. This is what I call value!

 

The sad thing is that many, if not most teachers don't have the desire, knowledge, and/or time to research the best 403b to match their situation. Often times they end up not having a 403b at all, contributing to a low performing low-cost or high-cost plan, do not have a proper asset allocation, or being taken advantage of by a salesperson. I have heard that there is possible legislation that would make all 403bs ERISA plans and therefore would require school systems to act as fidicuaries. I think this may be very helpful to the masses of teachers out there who could and should have more for retirement.

 

By the way, I didn't say you always get what you pay for. In my friend's case though he probably will. If you pay an M&E fee, a "load", or high expense ratios, your performance will USUALLY be lower than in similar (risk, allocation) low cost options. I was just sharing in my example that this is not always the case.

 

By the way, I have two 403b plans. A low-cost plan and a higher (still under 2%) cost product. Both have performed well due to the funds I have selected (asset-allocation). This may be a good option for people who need some advice and want to keep overall costs down. However, I would like a 403b that has the PIMCO Total Return fund as an investment option. Has anyone seen this?

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Hi Chad,

I think you are in California. If you go to 403bcompare.com and enter Pimco Total Return in search, you will find that many vendors offer the fund. Best Wishes.

 

Joe

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Guest Sierra

I assure all of you that my position is based on CS (common sense) backed up by a conversation with a actuary. And it is not a waste of time TR because there seems to be a difference of opinion among the actuarial community and we should continue the research. TR, are you of the opinion that prior to 1952 when TIAA came out with the first VA called CREF that there was no such charge as the ME fee?

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Guest TR1982

Sierra,

Please tell me the exact number of actuaries you require that say there is no M&E on a fixed annuity before you will concede the point. Otherwise, this is a waste of time. It might be common sense to you, but it's not to me. Besides, there is no point here and I can't see that anyone will be better informed if 10 actuaries say it as opposed to 1 or 2. I did exactly what you asked me to do the last time we discussed this and apparently you want to change the rules again. Forget it.

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Guest Sierra
Sierra,

 

First off, I'm not a fan of M&E and suggest to my teacher friends to avoid it in their VARIABLE annuity 403b accounts as a general rule. The higher the M&E the worse the product in my opinion. Pacific Life has a 403b plan with a M&E of 1.4% PLUS other fees ...ouch!

 

In regards to the Fixed annuities, there is no M&E. I usually agree with guys who wear funny hats, but... In a fixed annuity a person cannot lose money. They are guaranteed a minimum rate (maybe 1.5%), so their account value will always be more than their contributions. If the teacher dies, the value cannot be less than what they put in, therefore there would NEVER be an insurance pay-out. If an Insurance co. was charging a mortality fee knowing that they would never need to pay-out a claim the State Dept. of Insurance would close them down for fraud (at least in California). If you ever find a fixed annuity that charges an M&E alert the authorities (and let me know).

 

Joel's response: OF COURSE THE ME FEE, AS APPLIED TO A FIXED ANNUITY IS UNNECESSARY AS FAR AS A DEATH BENEFIT DURING THE ACCUMULATION PHASE! THAT IS COMMON SENSE!

 

HAVING SAID THAT YOU FAIL TO RECOGNIZE THAT THE CURRENT CONTRIBUTIONS/ACCUMULATIONS ARE BEING GUARANTEED A FUTURE ANNUITY PAYMENT RATE. (FOR EXAMPLE: $.08 PER YEAR PER DOLLAR OF ACCUMULATION AT AGE 65)

 

SO I ASK YOU: IF THIS FUTURE LIFETIME INCOME GUARANTEE IS NOT VIA THE ME FEE WHAT IS THE NAME OF THE FEE THAT GUARANTEES THESE FUTURE ANNUITY INCOME RATES?

 

Joel

Chad, Please find my reply in CAPS AT THE END OF YOUR QUOTED POST.

 

Joel

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Guest Sierra

TR: First I retract my remarks about there being a difference of opinion in the actuarial community with regard to the application of a ME fee to fixed annuities. There is no debate! The ME fee applies to fixed annuities!

 

The Genworth actuary said to you: "Fixed annuities (non-variable)do not have M&E's or mortality expenses applied against the contracts. They are simply the premium accumulated with interest and adjusted for withdrawals."

 

You are misinterpreting his statement. Not having the ME "applied against the contract" means that the ME fee is factored/incorporated into the mathematical computation when the insurer is deciding what the fixed interest rate will be. This is different than the ME fee's application to the VA where it is "applied against the contract."

 

Ex: One knows he is earning 5 percent on his fixed annuity, the 5 percent is net of the ME fee. But when it comes to a Variable Annuity where the sub account earns 10 percent but incurs 100 bp in expense ratio fees and 100 bp as a ME fee the 200 bp must be subtracted from the gross return of 10 percent in order to arrive at 8 percent which is the return net of the ME fee and the operating expenses of the sub account.

 

If you go back to the Genworth actuary and read to him this post he will be in full agreement with me. In the alternative if you send me a personal email with his name and contact number I will call him to ascertain from him his full agreement with me.

 

When I posed the question to the actuary I called he responded using the same basic phrase as "not applying to the contract" and then proceeded to give an example similar to the one I have given to you.

 

If the above doesn't work for you please answer the following: What is the name of the fee the fixed annuity holder pays in order for his accumulating premiums/contributions to be guaranteed future annuity income rates? For example: $.08 per year per dollar of accumulation starting at age 60.

 

Peace and Hope,

Joel

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Joel, if you're insisting that there is such a thing as an M&E fee for a fixed annuity, it should be no trouble to quote one from a prospectus. Please do so. Two financial advisors (TR & Chad) have written here insisting there is no such , and a Genworth actuary has been quoted. The simplest way to settle this is to quote from a prospectus. If you can't find an M&E fee in a prospectus for a fixed annuity, then there is simply no such thing.

 

I don't want to hear any more about "common sense," because (and this is not said to offend) your version of "common sense" has not corresponded to mainstream definitions of common sense in the past.

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Joel,

 

FT is correct in that insurance co.s have to disclose fees, if they didn't they would never disclose the M&E fees on their variable products. They make money (alot) by paying low fixed, guarentees on fixed annuities. The way they make money is by investing the money people put into the fixed annuity (by the way, this money becomes an ASSET of the insurance co. and they can do whatever they want with it. For example, they may decide to invest it non-U.S. companies that use child labor). If they lose money on their investments, their obligations (annuity payments) could be greater than their assets. This doesn't happen too often, but when it does the ins. co. could go under and your "guarenteed" annuity payments could end! That's another reason (in addition to low yields) why FIXED annuities are not suitable (in my opinion) for the vast majority of people.

 

Chad

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Guest TR1982

"You are misinterpreting his statement. Not having the ME "applied against the contract" means that the ME fee is factored/incorporated into the mathematical computation when the insurer is deciding what the fixed interest rate will be. This is different than the ME fee's application to the VA where it is "applied against the contract." "

 

Sierra,

I will agree with you on this. It is a cost in the product. They just don't specifically call it M&E.

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Guest Sierra

Sierra,

I will agree with you on this. It is a cost in the product. They just don't specifically call it M&E.

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

The insurer calls it ME on their internal accounting/actuarial system. It is simply not disclosed in the prospectus just like we all know there are fees with mutual funds and variable annuities that are not disclosed in the prospectus. These undisclosed fees are referrred to as implicit fees while the ones disclosed in the prospectus are called explict fees.

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