Overdogs aren’t popular. Think – New England Patriots, Facebook, and Darth Vader.
Large insurers in the Non-Erisa K-12 403(b) retirement market dominate this space with armies of salespeople, lobbyists, regulatory capture, and deep pockets.
In some industries, overdogs provide outstanding products – others not so much. The 403(b) market falls into the latter category.
They have the watches but we have the time.
AXA Equitable is THE OVERDOG in this space. Having over 800,000 school employees as clients in 17,000 plans.
Their most popular product is the AXA EQUI-VEST Series 201 Variable Annuity.
Warwick Valley Financial Advisors provides an excellent analysis which you can read here
Their findings include:
Summary of Fees
- Administration charge: 2% or $30
- Separate Account Charges: 1.20 % (Mortality & Expense charge 0.95% + other expenses 0.25%)
- Underlying Portfolio Operating Expenses: 1.03% (average fund expense)
- Personal Income Benefit Charge: 1%
- Withdrawal Charges: 5%
The average teacher pays annual operating expenses in the range of 1.81% -2.63% The average 401(k) costs participants .88%. source:BrightScope
Insurance salespeople receive commissions to distribute this annuity.
AXA pays agents 1.5% to 2% commissions on every future dollar you contribute to your 403(b) annuity. This creates ongoing compensation for your broker.
If you’re contributing the maximum 2018 amount of $18,500 to your plan and, if over 50, also taking advantage of $6,000 catch-up contributions, then AXA could be paying as much as $490 a year to your broker.
Some say variable annuities shouldn’t be compared to mutual funds because they provide more features and benefits. The real question becomes: Are these benefits worth the steep price teachers pay?
This variable annuity contains a death benefit. Beneficiaries receive the total amount of premiums paid. Including meeting an untimely death during a market meltdown. Teachers love this, being very conservative investors and looking at market volatility as their arch enemy instead of a long term friend.
Here are three items teachers don’t take into account before purchasing this insurance.
- First, the death benefit is only paid out if you die. It does not guarantee that your account won’t lose money.
- Second, this benefit doesn’t come free. You’re paying for it with the M&E fee we talked about earlier.
- Third, you really have to ask yourself, what are the chances that you will die during the same year as a big market downturn?
Source; Warwick Advisors
A lawsuit filed against Hartford Life by 24,000 municipal employees in San Diego and Los Angeles brought this point to light. In the 17 years, these plans existed exactly $119 was paid out in this particular benefit! Cheap term life insurance provides much cheaper and larger insurance if this was a major concern.
Many teachers purchase an income rider. Guaranteeing income withdrawals will never decrease. (Unless you make early withdrawals) This costs an additional 1.00%.
This complex benefit limits investment choices to a few options. Most teachers can’t define mutual fund. Terms like high-water mark and crediting method might as well be explained in Chinese.
Low-cost index funds CAN be annuitized into an income stream by purchasing a simple fixed annuity. Few teachers are aware of this fact.
This simpler and cheaper strategy probably doesn’t make sense either since most teachers receive a pension and social security but I digress…..
Even if teachers figure out this product is “sub-optimal”, the Hotel California syndrome kicks in.
“You can check out any time you like but you can never leave.”
According to AXA’s description of their surrender fees:
“. . . the amount of the withdrawal charge deducted is equal to 5% of any contribution withdrawn attributable to contributions made within the current and five prior contract years, measured from the date of the withdrawal.”
There is nothing illegal in what AXA is doing. School districts have no fiduciary oversight over investment options in this archaic system
Securities laws based on disclosure – rather than the reality of how investors behave are also outdated. Lisa Braganca Former SEC Branch Chief
Teacher’s 403(b)s are the retirement plan’s version of the land that time forgot.
That being said, the following questions deserve answers.
Does taking advantage of people because you legally can make it right?
Would any fair-minded person with a basic knowledge of investing choose an expensive variable annuity to fund a loved ones’ retirement?
Do tax-deferred annuities have any business belonging in tax-deferred accounts?
Are income riders necessary for teacher’s who may be eligible for both social security and a pension?
Do long term investments in the stock market need insurance against losing principal?
Are surrender fees appropriate in a retirement account?
Why are these products not found in private sector 401(k) plans?
Are products designed to produce income streams and provide protection of principal appropriate for the wealth accumulation phase of a teacher’s career? Or anyones?
Do teachers with a limited grasp of finance understand all the disclosure in a 300-page prospectus?
The Overdog says yes.
We respectfully disagree
Underdogs keep banging the low-cost index fund drum and preaching the value of fiduciary advice.
Historically, our plight is not unusual.
Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has. Margaret Mead
There’s a good reason why people love the underdog.
Especially when they’re not hocking annuities to a Kindergarten teacher during her lunch period.