Annuities Rant Part III – Moderating my Complaints

I spilled considerable ink this Spring bashing all manner of insurance products peddled as investment products. I base my un-sell of insurance products on their complexity, illiquidity, mediocre returns, and high costs. Now I will pull some of my punches and give a more moderated view of some annuity products.

The summary of my more moderate views: Some people are happy with their variable annuities and have had good returns, without paying excessive fees. If you already own an annuity product, I don’t think you should necessarily sell it right now, or right away. Finally, fixed rate annuities are at least simple. I like simple.

Don’t get me wrong. I don’t actually endorse these things. 

Annuities generally put me in a dark place. 

Other than their complexity, illiquidity, mediocre returns, and high costs, I like annuities just fine.

It’s like that awful joke: “Other than that, Mrs. Lincoln, how did you like the play?”

Other than that Mrs. Lincoln, how did you like the play?

I’ve received numerous responses from insurance salespeople this Spring about how weak my arguments are regarding annuity products. I read their responses and think of Upton Sinclair’s wisdom: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Occasionally, when feeling cheeky, I respond to those emails, with Sinclair’s words.

But a thoughtful column-reader recently responded to my variable annuity-bashing by sharing his carefully kept spreadsheet of his variable annuity with Vanguard, which he bought in 2004. Quite frankly, he’s has been happy with it ever since.

His annuity owns a mixture of seven different equity-based Vanguard mutual funds. Whereas most variable annuity funds I’ve seen charge 1.5 to 2.5% management fees, his funds average 0.55% management fee, which I find utterly reasonable. In addition, the “mortality and expense risk charge” accompanying variable annuity funds – which typically runs from 0.4% to 1.75% across the industry – is a mere 0.17% at Vanguard.  Again, quite reasonable. 

Not coincidentally, he’s happy to report, his returns since 2004 have been quite competitive.

With a starting value of $110 thousand in early 2004, his funds grew to $340 thousand by mid-May 2019. That’s a 7.7% annual return over a little more than 15 years. 

That compares pretty well with an 8.7% return including reinvestment of dividends of the Wilshire 5000 Index of the broad US stock market, or an 8.3% return for the S&P500 index of large US companies. Given mutual fund management costs, I’d say his 7.7% annual compound return on his variable annuity is as good as one could reasonably expect.

dqydj

His stated reason for purchasing a variable annuity product, rather than a straight brokerage product, is to simplify passing on wealth to his heirs. His belief is that the variable annuity will pass smoothly to his intended beneficiaries without the risk of going through a probate court. I am no estate-planning expert, but if this gives him peace of mind, then that’s great.

One of the distinguishing characteristics about this variable annuity investor is that he was not sold the product by a commissioned salesperson. That partly explains his low costs.

My second moderating comment about various annuity products is that I would not presume to tell anyone to sell theirs, if they already own one. That’s a question that I get asked whenever I talk about how terrible they are. 

So I’ll say it clearly: If you have an annuity already, don’t sell it right away. Often in personal finance matters, inaction is the best course. This is because action is costly, and other alternatives could be worse. Maybe what’s done is done. Maybe your annuity works for you. Maybe you have plenty of money already. I’m mostly talking about what you should not buy in the future. 

Without knowing anything about your specific situation, a plausible solution to your problem of “I’m currently paying into a terrible annuity product, what do I do?” is to cease paying in to that product, starting paying for a better product, and then over time evaluate whether and how the existing annuity you bought can play a reasonable role in your long term financial plan.

And then finally, what about a fixed rate annuity?

I recently received a quote from my preferred insurance provider for a fixed rate annuity. I wanted to know, assuming I turned over $100,000, what kind of monthly lifetime income could I lock in? The answer is $391.64 per month, for life. I’m 47 years old. Were I older, the monthly payment would be higher, since I’d be more likely to die quicker.

The expected return on my fixed rate annuity was 3%. I don’t find that sufficient. I would never advise anyone with a net worth less than, say, $5 million, to buy one of these. 

On the other hand, it’s very straightforward. We can all have different preferences for risk. Some annuities, especially fixed rate annuities, provide certainty. Fixed rate annuities like this are terrible for growing wealth, but have the advantage of simplicity. I like simple. And no fees. You turn over your $100 thousand. You lock in $391.64 for life. They are easily explained and understood. They never let you down. 

Except under conditions of medium to high inflation. Other than that though, they’re safe.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

Annuities – Death Eaters

Annuities Rant Part I – Complexity

Annuities Rant Part II – High Fees, Low Returns

Variable Annuities – Shit Sandwich

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Annuities Rant Part II – Low Returns and High Fees

Editor’s Note: Please see Annuities Part I here.

Another reason I don’t like fixed rate, fixed index, and variable annuities is their low returns and high costs. These are directly related. The higher the costs to you, the lower your returns.

To begin with the simplest of the three types, fixed rate annuities are the exception in that they do not charge high fees. In fact, generally they don’t charge you any fees at all. Instead, they offer you very low returns. 

I recently pulled some quotes from my preferred insurance company. For amounts less than $100,000 I could earn 2.6% guaranteed on a fixed rate annuity for the next five years, and I could earn 3% if I invested more than $100,000. I checked rates with another provider online and received quotes in the similar range of 2.8% and 2.95% respectively. That rate changes over five years. Mine had a minimum reset rate of 1.3%, after the five year term. 

What should we think about these rates?

With a product like this, you should always reasonably expect that the annual return on a fixed rate annuity, adjusted for inflation and taxes, will be approximately zero. That’s not a typo. That’s just a rule of fixed rate annuity products and risk-less products in general.

Now, figuring the returns of fixed index and variables annuities is trickier because they are somewhat market driven and depend on what you pick as underlying investments and risks. But we can understand what the costs are, and therefore their expected underperformance versus comparable assets you could buy from a brokerage company.

With a variable annuity you have the chance to purchase mutual funds similar to funds at a brokerage account. Costs will weigh down your returns, however. 

The management fees of mutual funds offered inside a typical variable annuity are typically very high. In the 2018 Brighthouse Financial Life (formerly MetLife) policy variable annuity contract I reviewed, the costs of mutual funds ranged from a low of 1.56% to a high of 2.71%. Hello? 1987 just called, and it wants its mutual fund fees back.

The cheapest 1.56% fund was a stock index fund which low-cost brokerages offer at 0.05% – or 31 times cheaper elsewhere. I really didn’t enjoy the 1.66% fees quoted on the Blackrock Ultra Short Bond Portfolio. That fund has a 10 year return of 0.39% – meaning you could have locked in huge losses after fees for the past decade, on a product supposedly meant to preserve capital. These types of egregious fund management costs are the rule, not the exception, when it comes to most variable annuity fund offerings I’ve reviewed. The Teacher’s retirement System (TRS) in Texas just capped mutual fund fees inside variable annuities at 1.75% following a “reform” in October 2017, to go into effect in October 2019. These fees are, in a word, bad. Even after that “reform.”

Why are the fees so high? I have a theory, and it goes something like this.

Insurance companies can impose huge fees on variable and fixed index annuities because they have selected their customers very carefully. Only people who don’t know what they are doing would select these providers and these products. So in essence they can charge whatever they like.

They employ psychology similar to how the “Nigerian Prince” scam artist who supposedly wants to wire you $10 million will purposefully misspell words in the solicitation email. The Nigerian Prince scammer knows that any target victim who replies has no powers of discernment. The misspelling in the email is a purposeful selection process by which the scammer chooses the right kind of victim.

Seems legit, right?

Similarly, whenever a public school employee sets up a “finance and retirement discussion” meeting with a commissioned insurance salesperson, the salesperson can have high confidence that the teacher has absolutely no idea what they are doing financially. The result: high fees, with impunity!

Of course, there are more fees after that. 

Arguably the main service an insurance company provides with variable and fixed index annuities is a lifetime guarantee of payments, because they employ actuarial math that helps them make educated guesses about how long you’ll live. That seems like a service. And the insurance company seems to be taking a risk on you.

Ah, but they aren’t, not really. These complex annuities also charge a fee on your account called the “mortality and expense risk charge” – offloading that specific risk that you live too long – to you. 

The 2018 Brighthouse contract I reviewed charged 1.2% per year for this “mortality and expense risk,” and the industry range is an extra 0.4 to 1.75% per year on these products. The lesson: If you charge high enough fees, you don’t end up taking a risk.

Finally, here’s my least favorite of all the low-return/high cost features of fixed index annuities.

This gets a bit technical, but bear with me, because this is really how the sausage is made.

The insurance company calculates the ‘growth’ in your fixed index account value based on the change in value of a stock market index over a year, but does not take into account dividends or the reinvestment of dividends that you would get, were you invested in the market directly through a brokerage account. 

Over long periods of time working towards retirement – I’m talking about decades – the growth of your investment may be in substantial part due to dividends. Because of the way the company calculates returns, however, you probably don’t get the return on dividends from a fixed index annuity. 

Does this matter? Oh yes.

Let’s say you had $100,000 in an S&P 500 brokerage account beginning in May 1989, held until May 2019. The return on the index over 30 years, considering only index price changes, is 7.7%.

However, the return on the index over 30 years, including the reinvestment of dividends, is 9.9%.

Hmm. Is that annual 2.2% difference a big deal? Yes it is. It’s the difference between ending up 30 years later with $818,000 or $1.6 million. But if you, as a fixed index annuity investor don’t get the credit for dividends or the reinvestment of dividends, who kept that money? Do I have to spell this out for you?

Over a long period of time, you may be leaving half your investment gains with the insurance company.

When you are a hammer, everything looks like a nail. Similarly, when you are an insurance company or commissioned insurance salesman, the investment solution everyone needs for retirement is an annuity. It’s what you sell.

As I do not sell annuities, all I can say is: Don’t buy these.

A version of this rant ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

Annuities Rant Part I – The Complexity

Annuities Rant Part III – Condoning in Some Ways

Annuities – Death Eaters

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Annuities Rant, Part I – On Complexity

Fixed rate annuities, fixed index annuities, variable annuities – how do I hate thee? 

I’m not recommending this book. I haven’t read it. I just like the double-entendre of “Cons” = Convicts and “Pros = Only professional salespeople could like this.

Let me count the ways, for they are plural.

Let’s start with annuities’ complexity. In a future post I will address their mediocre returns and high fees. 

Complexity matters because of a basic rule of financial products I just made up which, if you read it out loud, will sound a lot like your Miranda Rights:

“You and your money have the right to simplicity. Whatever you can’t understand can and will be used against you by the financial service provider.”

Annuities come in three main flavors. 

The vanilla flavor – fixed rate annuities – are actually decently simple. These are not evil. You give money to the insurance company, either all at once or over time, and they agree to give you back your money in equal monthly payments, either for a fixed amount of time or more typically for the rest of your life, guaranteed. The only fancy complex math going on in the background of fixed rate annuities is an actuarial guess about when you’ll die.

The other two flavors – the confusingly named fixed-index annuity, and its close cousin the variable annuity – are far more complex. Their structures vary from company to company, so in describing them I can point out the possible complications, but the specifics will be hidden from you somewhere in the fine print of your contract. Like an Easter egg hunt, but far, far more costly.

The other flavors start out with opaque calculations as the insurance company collects your money over time. At some point when you’re done giving money over they morph into a simpler fixed annuity. In this way, the fixed index and variable annuities are like hungry fuzzy caterpillars, disgusting to look at. Eventually, however, they annuitize and become simpler fixed rate annuity butterflies.

In prepping this review I read every word of some of the most boring variable annuity product plan documents you can imagine. Three different company contracts from 2008, 2014, and 2018, plus The National Association of Insurance Commissioner’s Buyer’s Guide To Deferred Annuities.

So, about the complexity of fixed index annuities, and their variable annuity cousins. Both give the buyer exposure to “the market,” but in an indirect way.

With a fixed index annuity you give your money to an insurance company and they promise to credit your account with some of the gains associated with a stock market index, such as the S&P500 of large cap companies or the Russell 2000 index of small cap companies. But exactly how they do that is usually calculated in a complex way. The basic value proposition from the insurance company is that they say you can participate on the upside when the stock mark appreciates, but they will provide some protection from loss when the stock market drops below the amount you put in, or drops below the previous year’s highwater amount. It’s a kind of “some market upside and some safety” combo platter. Sometimes that protection is against a 10% drop in the market, sometimes it’s against any loss of principle.

But how do they provide this “safety?” A bunch of ways. Sometimes the contract limits your upside by a “participation amount,” like 80% of the index gains. So if the market index returns 10%, you get credit for just an 8% annual gain. Another feature might be a “performance cap” that limits the amount an insurance company will need to credit you with, in a bull market. The market went up 12%? Sorry, your gains are only 9%. You might pay a “Spread Rate” which is a % of market gains, by which your insurance company subtracts your returns. Spread Rate doesn’t sound like a fee, but that’s what it is.

A particularly devious way to limit your returns is to only credit the price change of an index, but not the dividends you would have received if you owned the index in a brokerage account. As I’ll explain in a future column, that might mean you’ve left half your gains on the table.

with guaranteed benefit riders. Helping to Protect your Income. in Unpredictable Markets. Variable Products: Are Not a Deposit of Any Bank • Are Not FDIC Insured by Any Federal Government Agency • Are Not Guaranteed by Any Bank or Savings Association • May Go Down in Value. ML

How does the company handle all this complexity? 

As Jefferson Bank’s contract clearly states, “Subsequent Accumulation Unit Values for each Sub-Account are determined by multiplying the Accumulation Unit Value for the immediately preceding Valuation Period by the Net Investment Factor for the Sub-Account for the current period.”

It goes on like this for a couple of pages. I’ve read all the words and my head hurts.

Let’s go to the AXA Equitable document, to figure out our “Guaranteed Annual Withdrawal Amount” or (GAWA). Well, you see it’s, the, um:

  1.  “The sum of contributions that are periodically remitted to the PIB variable investment options, multiplied by the quarterly Guaranteed Withdrawal Rate (GWR) in effect when each contribution is received, plus
  2. The sum of (i) transfers from non-PIB investment options to the PIB variable investment options and (ii) contributions made in a lump sum, including but not limited to, amounts that apply to contract exchanges, direct transfers from other funding vehicles under the plan, and rollovers) that are allocated to the variable investment options, multiplied by the Guaranteed Transfer Withdrawal Rate (GTWR) in effect at the time of the transfer or contribution, plus
  3. The sum of any Ratchet Increase.”

Got it? As the teens would say: “Ratchet, dude”

Ok, here’s what you do need to know. You can’t independently observe their math. You own rights to a complex derivative – that’s not what they call it, but that’s what it is – and only they can tell you what that derivative is worth.

Variable Annuities should come with a 2-word review “Shit Sandwich”
Nigel Tufnel: “They can’t print that!”

With a regular brokerage account, by contrast, you would see an observable market price for a mutual fund, or a stock or a bond, or an ETF. 

Remember, anything you don’t understand can and will be used against you.

Do you want your money back yet? You can’t have it. 

Generally once you’ve annuitized, you can’t accelerate or change your fixed rate annuity. Prior to annuitization, you can have some, but you will probably pay surrender or withdrawal charges on any fixed index or variable annuity that you want to get out of. You may be able to get 10% of your money back each year without penalty, but for additional money you should expect to pay a 5% fee under many contracts, with a slowly declining penalty amount per year.

So that’s the story on complexity and illiquidity. I’ll tell you next time about the bad returns and the high fees.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts

Annuities Rant Part II – Low Returns, High Fees

Annuities Rant – Part III – I partly take it back, but not really

Ask an Ex-Banker about Annuities – Death Eaters

Variable Annuities – Shit Sandwich

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403(b) Plan “Reform” Only An Insurance Company Could Love

Surrender

403b_planWhile fixed and variable annuities make up over three-quarters of the products in public school employee 403(b) plans nationwide, both are inappropriate products sold by insurance companies. Their dominance is a perfectly legal crime hidden in plain sight that costs retirees $10 billion per year in costs, according to independent analysis by Aon Hewitt in 2016.

So what’s the big deal there?
The big deal takes a bit of explaining, but would be clear to any independent financial advisor. By “independent” I specifically mean “not paid by an insurance company.” I want to talk about first why the products are bad for school employees, and second, how it’s difficult to change the status quo in Texas. This is a game badly rigged by the insurance industry, at the expense of public school employees.

Public school district employees in Texas contribute over time to the Teachers Retirement System, (TRS) qualifying for 2.3% of their salary for every year served. Work for a school system for 20 years for example, and you’ll qualify for 46% of your employment income guaranteed, for life. (Because 2.3 times 20 is 46). That’s a fine deal for employees and very safe and lovely. It also means that long-term school district employees have a substantial fixed income guaranteed for life in retirement.

Prudent portfolio theory of diversification would tell you that you don’t need more fixed income annuities anchoring – and by anchoring I really mean more like sinking – the process of building up your retirement account. Fixed annuities are bad in this scenario because they offer a very low return that school employees don’t really deserve. That’s not what the insurance salesman is telling them, but it’s what an independent advisor would tell them.

Gold, Bitcoin, TimeShares, and Variable Annuities

Variable annuities are actually worse, because they charge extraordinary fees every year – TRS allows them to charge between 1.9 and 2.7 percent per year, more on that later – and further fees if you ever want to get out. Variable annuities are one of the Four Horsemen Of Your Personal Financial Apocalypse.1

School district employees: If you already set up your 403(b) account with that nice insurance salesman after the free pizza meeting in the teacher’s lounge, I know you ended up with a variable annuity product in your 403(b) account, because that’s what they’re paid to sell you.

It’s hard to fully describe just how broad the consensus is among non-insurance folks about the inappropriateness of variable annuities due to their high costs. They are the kind of product one sells, but never buys. Meaning, the people who like them are the salespeople. Everybody else – except, sadly, school district employees – knows they are terrible.

Now I’m talking directly to school district employees: Why should you believe me rather than that nice insurance salesman who bought you free pizza and put you into an annuity product rather than a brokerage product? Because I’m not being paid either way. But he is.

He is especially paid if you buy an annuity product, and specifically a variable annuity product. He’s likely paid a 5 percent commission on your upfront investment, and between 1 and 2 percent of your contributions thereafter. Now that’s what I call a great long-term annuity! For. The. Salesman.

When a stupid finance problem persists, like the status quo of public school 403(b) plans in TX, despite the fact that it’s obviously stupid to any non-conflicted observer, it’s worth asking: Why? Who benefits?

Who benefits from the stupid status quo?

The answer to that why question often lies in some regulatory and legislative garbage fire of complexity. Within that complexity, incumbents with lobbying power at the legislative choke-point can squash solutions as they occasionally arise.

Speaking of which, let’s talk about the last time TRS attempted reforms to 403(b) plans, in 2017.

TRS staff periodically reviews rules and fees and makes recommendations to the board to revisit fees in 403(b) plans, which had been in place since 2002.

For context: One of the great developments of the past 15 years in investment management has been the astonishing drop in fees for brokerage products, with competition from low-cost providers such as Vanguard, Fidelity, and Charles Schwab.

Since 2002, investment providers to 403(b) in Texas had their fees capped at 2.75% per year by TRS. Also for context: That is crazy high cost in this day and age.

These days, 1 percent is an arguably reasonable fee for a retirement product, although competition has driven many fees in many fine products down to a fraction of that 1% benchmark.2

But 403(b) providers in Texas have been allowed to charge between three and twenty times more money for products in a 403(b) than investors could get elsewhere, outside of their 403(b) plan.

lambo
Did you buy a Hyundai 403(b) at a Lambo price?

What do these fees mean in practice? They are selling Hyundais to school teachers at Lexus and Lamborghini prices. Trust me when I say the products do not perform like a Lambo.3

So anyway, how did that reform go in 2017? Thanks for asking. TRS adopted rules adopting a sliding scale of fee caps, between 1.9 and 2.7 percent for annuity products, and between 1.65 and 2.45 percent for non-annuity products. This is the kind of “reform” only an insurance company could love. This is like when I ask my daughter to clean up her catastrophe of a room, and I return 2 hours later to find she has put clothes on her American Girl doll and brushed its hair, and then she declares the entire place fixed up. This is not reform!

TRS_PensionAnother rule adopted in 2017 included the continuation of hefty “Surrender and Withdrawal Charges” for twelve years after you buy a variable annuity. Oh, did I not mention that? If you want your money in a different product after you took the advice of that pizza-slinging salesman, you have to leave between 1 and 10 percent of your investment behind.

I don’t think they literally make teachers put both hands in the air to act out the physical sign for “Surrender” as they turn over 1 to 10 percent of their retirement investment to the insurance company. But they might as well have. The perfectly legal crime is the same either way.

Surrender
Just surrender those fees to the insurance company

Hey, insurance company lobby? You won. The 600,000+ public school employees surrendered. Nice job everybody.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts

TRS’ Problem of Choice with TX 403(b) Plans

Teachers Can’t Get Good Advice For Retirement

TRS Pension and Public Debate

Nobody Advocates at the State Level for Teachers’ 403(b) Plans

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  1. I’ll try to get that phrase copyrighted to me, thank you very much. Since you asked, the other three horsemen are gold, bitcoins, and time shares.
  2. I checked all my own accounts and I’m paying 0.16% on my most expensive fund.
  3. Yeah, you guessed it, I drive a Hyundai.

403(b) Plans in TX – The Terrible Problem of Choice

Retirement

RetirementSchool district employees in Texas attempting to fund their own retirement – through 403(b) defined contribution plans – face a garbage fire of bad choices.

A neutral and expert observer – anyone not directly benefitting from insurance industry money – can look at the retirement options mandated by school districts and see a rigged game.

Problem of Choice

How is the game rigged? Let’s start with the 403(b) plan problem of “choice.”

School district employees typically have access to a 403(b) plan – a tax-advantaged retirement savings plan through automatic payroll deduction. 403(b) plans as designed and regulated in Texas appear uniquely suited to make a lot of money, not for school district employees, but rather for the insurance industry.

Here’s the first problem with the 403(b) options, because of regulatory and legislative restrictions. In Texas, as in other states like California and Ohio, school districts may not be proactive or selective about what retirement companies and products teachers may access. This is known as an “any willing vendor” rule, according to school district retirement consultant Cecile Russell.

I imagine this “any willing vendor” idea was once sold to legislators as reasonable because it encouraged “choice,” which sounds appealing at first glance. What it actually does is stuffs the menu of investment options to a ridiculous point with insurance companies and insurance products.

Better Design

A better program design, better than this “any willing vendor” model, would involve limiting choices in 403(b) plans to low-cost and appropriate retirement products. A better plan would be designed by experts with fiduciary responsibility looking out for the best interest of school employees. Just as private sector 401(k) designers have to do. School districts in Texas are not allowed to do this with their 403(b) plans.

trsIn Texas the Teachers Retirement System has approved 65 separate vendor companies. There are actually 74 approved vendors listed by TRS but some of those are affiliated companies.  These vendors in turn offer 10,520 eligible investment products to school district employees.

That’s the first problem. Having 10,520 choices is not good. It’s a behavioral finance nightmare which produces what an economist would call “The Paradox of Choice” but which we could also understand more simply as “The Deer in the Headlights” response. For some, their 403(b) plan contributions stay stuck in a money market account earning no return. For others, they use the random dartboard approach to investing. The third option, by design, is that school district employees invest according to the plan of that nice insurance salesman offering free pizza in the teacher’s lounge. All of these are bad results in their own way.

At least two-thirds of approved 403(b) vendors in Texas are insurance companies or have insurance affiliates. Do you want to guess the result of having insurance companies as the dominant providers for 403(b) plans?

A study by independent consultancy Aon Hewitt estimated in 2016 only 24 percent of 403(b) investments are in mutual funds (the preferable products), compared to 43 percent in fixed annuities (the inappropriate product) and 33 percent in variable annuities (the abominably high-cost product.) Those last two products are specifically insurance-company products, whereas mutual funds are typical brokerage company products.

aon_hewittThe result of these asset allocation choices, AON Hewitt estimated, is $10 billion in extra costs paid by 403(b) participant investors, as compared to a comparable 401(k) style investment platform available to private sector workers and products. This is a multi-billion dollar fiduciary failure involving many responsible parties.

One way to understand the asset allocation problem is to understand the effect of compounding different returns over a long career. A school employee who managed to put away $50,000 in her 403(b) by age 30 faces a vastly different retirement depending on what she chooses as her primary investment vehicle. A 4% return on that investment would become worth $240,000, as compared to an 8% return becoming worth $1.08 million by age 70. Differences in returns, when compounded over 40 years, lead to massive divergences in results. Costs and investment products matter tremendously.

Before 1974, only insurance companies could provide investment products to 403(b) plans, giving them a head start with these types of plans. But 45 years later, the relative absence of mutual fund providers stands out as a shocking result. After so many years that result must be considered a feature, not a bug, of 403(b) plan design. It suits the insurance industry to keep this territory for itself, at the great expense of public school employees.

Can reasonable people disagree reasonably?

Now, I haven’t yet explained yet why insurance products are particularly pernicious in Texas 403(b) plan platforms. Many nice people, including especially insurance company employees, believe these to be fine products.

They are not.

I am not anti-Insurance. I buy insurance. It has an important role to play in all of our financial lives. Fixed and variable annuities are not good products, however, for a retirement plan. They are specifically inappropriate within a Texas public school employee’s retirement account. But they account for 75% of the products!

I don’t work for any finance or brokerage company. This is precisely why, even if you don’t understand my point straight away, you should at least believe that I don’t have an ax to grind, except to state the truth as I understand it.

I would go so far as to say that any independent fiduciary for a teacher’s retirement plan – and by independent again I mean someone not paid by any finance company – would agree that these are not the best products for public school district 403(b) plan participants.

And yet, they are the dominant products. Why is that?

In subsequent posts I will lay out the plausible explanation for this result, which is a perfectly legal  – but ought to be illegal – crime hidden in plain site.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

See Related posts:

403(b) Plans – Failed Reform Only An Insurance Company Could Love

Teachers and Their Retirement Problems

Public Policy Debate on Teacher’s Retirement in TX

Nobody Advocating to Fix Teachers’ 403(b) Plans in TX

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