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Dan Otter

How Valuable Is The M&e?

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Guest TR1982

Joel,

 

I would ask you to consider this:

 

Over the years it has been well known in the industry that TC has had very low mortality costs. However, many of us who have had to compete with them have also known that TC split the costs over the employees' lifetime.

 

For example, they charged a low expense ratio in the accumulation phase, but in the payout phase they varied the expense ratio from year to year by varying the payout amount from year to year. In this way, TC recouped their mortality costs from the employee. What made this really work to their advantage was that for decades employees were forced to annuitize their accounts with TC at retirement. So TC was guaranteed to recoup all that cost at the back end.

 

My point is that there is more than one way to skin a cat. Most VA companies have never had the luxury and advantage that TC had to recoup those costs in other ways. We often ran examples in house to document that our firm actually gave the employee more money over their lifetime using our accumulation and payout rates. I think this is part of the marketing "fluff" that TC has been able to pass off on their customers over the years.

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Guest Sierra

It goes without saying that a profit making insurer must make it on the performance end in order for its financial products to compete with the np T/C. This is why I say that one who buys a commissioned based product is betting that the two birds in the bush (loaded product) will be worth more in the future than the bird in hand (no load product). In my view this is a poor bet.

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Guest TR1982

Well,

If you are looking at cost analysis only, I would say you are correct. But I also think you can make a case for money management talent. Over the last 5 years we've seen TC turn in mediocre numbers on their investment performance. There is an article Morningstar published this month about TC and they point out some of the strengths and weaknesses. Their conclusion was in the realm of low cost providers they feel Vanguard is still a better choice and they definitely have a bias toward no load choices.

 

The point I was making is that even with the advantages they posessed, they still didn't offer significantly greater value than "higher cost" options.

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Guest Sierra

Investing for retirement is a half century or more endeavor so a five year period of comparision is hardly an appropriate time frame.

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Guest TR1982

If that's true, than why does the average retail investor only stay invested in a fund for an average of 3.1 years? Would you apply that same standard to other firms that are loaded or have higher expenses than TC? Those perspectives are nice but there is no evidence to support the idea that the average investor sees it that way.

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Guest Sierra

If that's true, than why does the average retail investor only stay invested in a fund for an average of 3.1 years?

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

Does this finding apply to pre-tax retirement savings accounts or after tax investing?

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Guest TR1982

Joel,

This information was from a study done by Dalbar in 2003.

 

 

"Market Chasing Mutual Fund Investors Earn Less than Inflation

 

For more information or to purchase Quantitive Analysis of Investor Behavior (QAIB), click here to view the introduction and table of contents and here to download the order form.

 

Some investors are savvy (or lucky) enough to profitably time the markets -- but they are the exception. Millions of investors chase returns after hearing about markets ups and downs on the six o’clock news and a recent DALBAR study shows that most equity fund investors earn less than inflation as they try fruitlessly to buy low and sell high. Fixed income investors do a little better, but still earn far less than the index.

 

Motivated more by fear and greed than intellect, these investors chase market returns to the detriment of their pocket books. An update to DALBAR's Quantitative Analysis of Investor Behavior (QAIB) study shows that since 1984, equity mutual fund shareholders have held their funds for just a little over two years, and as a result have earned less than inflation. Investors in fixed income products do a little better but still earn far less than posted returns.

 

* The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% that the S & P 500 index earned annually for the last 19 years.

* The average fixed income investor earned 4.24% annually; compared to the long-term government bond index of 11.70%.

 

Investors are not swayed by major political events. Trading volume remained flat for equity and fixed income funds through major political events including the World Trade Center and Pentagon Attacks in September 2001, Bush/Cheney Election in November 2000, and the US Cole Bombing in October 2000

 

Instead, it is the ups and downs in the market drive investors to trade mutual funds as quickly as one would trade baseball cards. Monthly cash flows in and out of equity and fixed income funds track almost exactly to the market – and have done so since 1984. Trading volumes spike along with spikes in the market."

 

This data is for all investors, pretax and posttax.

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FT: The ME fee for a fixed annuity is one of the "implicit" fees. Implicit fees are not required to be disclosed. Another example: You go to a restaurant for a fine dinner---do you find the cost of providing you with water listed on the check? Of course not. It is "incorporated" in the final amount. It is an "implicit" cost. "Like TR has said: "It is a cost in the product"

 

I trust I have helped both you guys understand the ME fee and how in impacts the fixed annuity product. Should you have any concerns or additional questions just post 'em up

 

 

Without wanting to run in circles, Joel, what you've shown here is that there IS an implicit cost in fixed annuities. What you HAVEN'T shown is why we should call that cost an "M&E fee." You could just as easily call it an "annual fee," an "accounting fee," a "cost of doing business" fee, or a "profit for the bank" fee. An M&E fee is a very specific thing with a very specific definition. I still haven't seen any evidence that it exists in a fixed annuity. There are implicit costs in a fixed annuity, of course, and the issuers of such annuities make their money through those fees. But I don't see where they are M&E fees.

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Guest TR1982

FT,

You are correct but Joel wants to call it an M&E. I say let him have his way. It's OK.

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* The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% that the S & P 500 index earned annually for the last 19 years.

* The average fixed income investor earned 4.24% annually; compared to the long-term government bond index of 11.70%.

 

 

These numbers are amazing. They clearly speak to the need for research before making a mutual fund investment, and patience after making that decision.

 

TR, is this Dalbar study available online anywhere, and if so could you provide a link? (Or is it a subscription-only thing?)

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Guest Sierra
FT:  The ME fee for a fixed annuity is one of the "implicit" fees.  Implicit fees are not required to be disclosed.  Another example:  You go to a restaurant for a fine dinner---do you find the cost of providing you with water listed on the check?  Of course not.  It is "incorporated" in the final amount.  It is an "implicit" cost.  "Like TR has said:  "It is a cost in the product"

 

I trust I have helped both you guys understand the ME fee and how in impacts the fixed annuity product.  Should you have any concerns or additional questions just post 'em up

 

 

Without wanting to run in circles, Joel, what you've shown here is that there IS an implicit cost in fixed annuities. What you HAVEN'T shown is why we should call that cost an "M&E fee." You could just as easily call it an "annual fee," an "accounting fee," a "cost of doing business" fee, or a "profit for the bank" fee. An M&E fee is a very specific thing with a very specific definition. I still haven't seen any evidence that it exists in a fixed annuity. There are implicit costs in a fixed annuity, of course, and the issuers of such annuities make their money through those fees. But I don't see where they are M&E fees.

FT,

 

We should call it a ME fee because the insurance industry calls the cost of guaranteeing future lifetime income the ME fee. Just because they don't disclose the fee in the fixed annuity contract does not mean that they don't call it that on their internal accounting/actuarial systems. Not one of the costs associated with the fixed annuity contract is disclosed in the contract. The ME fee is just one of those costs that are not disclosed. It is that simple.

 

Another example: MCI just decided to charge 99 cents to its customers who would like to continue to receive a hard bill each cycle. Does this mean that before this announcement an MCI customer received the hard bill for nothing----of course not!---it was an implicit charge. Now the charge becomes explicit. Either way---on the books of MCI it is labeled as "hard bill expense"

 

The ME fee does not have to be disclosed in order for the insurer to charge the fee just like MCI did not have to disclose all of these years the cost of sending out a hard bill. Like TR has said: "It is a cost in the product". Why don't you ask ING for its fixed annuity ME fee? Let's see what they say. But please don't wait until they voluntarily disclose it to you (like MCI did) before you come to the realization that they charge it to their fixed annuity holders.

 

I trust I have continued to help you understand the issue at hand.

 

Peace and hope,

Joel

 

 

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Guest Sierra

FT and TR: Long, long before TIAA established the first VA, the CREF the insurance industry offered fixed annuities. The ME fee has been around for a long as insurers have been selling fixed annuities.

 

FT: You are accruing a lifetime Defined Benefit pension from the NYS TRS. This will be nothing more than a guaranteed fixed annuity starting let's say at age 60. Your ME fee is factored into the annuity payout rate just as if you annuitized a sum of money with a profit making insurer. The TRS ME fee is very, very low about 3-5 bp, but it is there.

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I trust I have continued to help you understand the issue at hand.

 

 

You can rest well tonight, confident that you've done your usual transparent job of obfuscating the issue at hand.

 

You're asking us to believe that:

 

1. all fixed annuities charge M&E fees, but that

2. no fixed annuity explicitly mentions them, and furthermore that

3. in one of the most highly regulated industries in the country, the M&E fee is something that an insurance company can just slip into the deal without having to mention it anywhere, even though

4. every site I've visited, including TIAA-CREF, goes out of their way to mention the M&E fee for their variable annuities but doesn't mention them at all in conjunction with their fixed annuities, and

4. to illustrate just how "obvious" this is, you cite completely irrelevant examples of phone bills and other items that have nothing to do with financial services.

 

Sorry, but this is classic Joel L. Frank: repeat something a hundred times, and hope that people will accept it as truth. Having seen you be less than truthful about other issues, though, and exhibit an inability to simply admit when you're wrong, I can't accept your word at face value.

 

 

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Quick update: I called TIAA-CREF's 800 number, and asked the woman who answered specifically about the M&E fee on the CREF variable accounts. The information they gave me corresponded precisely to the information that is on the prospectuses on their website, and she pointed out (quite correctly) that they were among the lowest M&E fees in the industry.

 

I then asked them if there was an M&E fee on their fixed annuities. I was on hold for about 3-4 minutes, then the woman got back on the line and said that there was no M&E fee on the fixed annuities at TIAA-CREF. I said, "No M&E fee whatsoever?" She responded, "That's right, none."

 

I trust that I have been of assistance in helping you understand this complex issue. :-)

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