Variable Annuities have no place in a retirement account. Though rare in a 401(K), Annuities comprise over 70% of the assets in 403(b) plans. This version of financial malpractice deserves a special place in the insurance broker’s “Hall of Shame. ” Teachers have every right to expel these people and the products they hawk from their financial plans forever!
Fidelity recently put out a fact sheet regarding annuities. The most damning fact regarding their ubiquitous (always wanted to use that word) use in 403(b) plans can be found on page two. ” If you have maxed out on contributions to your 401(k), 403(b), other employer-sponsored retirement savings plan, or an IRA, deferred annuities can offer an additional tax-deferred vehicle to help you build wealth.2″
Whoomp There It Is!!! The only time a teacher should consider this product is after they have maxed out both their two current options for tax deferral, their 403(b) and Roth or Regular IRA. For a teacher over 50 years of age this amounts to a combined total of $30,500!($24,000 403(b), and $6,500 IRA)
This criteria eliminates the eligibility of about 99.9% of public school teachers for a variable annuity product. The question now becomes, Why the hell do so many teachers own and currently contribute to these inapplicable products?
How about we start with the fact that salespeople can earn 5-10% up front commissions for transacting annuities. Throw into the mix they can also win a free trip to Puerto Rico for making ” quota” and you can see why we have a real problem on our hands.
My friend and the insurance companies biggest nightmare, Scott Dauenhauer answers my previously stated question like only he can: Let’s review. An agent sells $1.5 million of this product to its base of clients and receives potentially over $100,000 in commission plus a trip to the St. Regis in Puerto Rico. That’s quite an incentive to sell Life Indexed Annuity products. I wonder if this product would sell at all if not for the high commission and potential for an amazing vacation? My opinion is that it wouldn’t. Bingo!!
He also goes on to say the insurance companies are hooked on these products like a form of financial “crack.” Unfortunately, most people will justify doing just about anything if the right amount of perverse financial incentives are placed before them.
My friend and colleague Ben Carlson recently posted something on twitter about conflicted financial advice. “It is difficult to get a man to understand something when his salary depends on not understanding it.” The Gilded Age Muckraker, Upton Sinclair, originally said this when he was warning about the evils of twentieth century Robber-Barons. Ben’s application is right on the mark in regards to modern day financial shenanigans.
In addition, the two reasons for choosing a variable annuity are building wealth or creating income. The fact is most teachers have a guaranteed pension. This along with Social Security often eliminates their need for income. Why would a teacher use a variable annuity to create wealth? The high fees attached to this product strongly inhibits capital appreciation.
There are few things more egregious in retirement planning than placing variable annuities inside 403(b) or 401(k) plans. If your current “advisor” is placing your paycheck contributions into these products, teachers need to ” terminate with extreme prejudice” the relationship immediately.
By selling annuities, well tanned salespeople are financing a comfortable retirements for themselves. The sooner teachers realize this, the better.