YOU HAVE FOUND OUR OLD WEB SITE. BE SURE TO CHECK OUT OUR NEW AND IMPROVED SITE!

Do Annuities Make Sense in a 403(b) or 457(b)?When the 403(b) was first created in 1958 annuities were the only investment option allowed. In1974 Congress added paragraph 7 to the plan creating the 403(b)(7) custodial account and openingthe way for investment in mutual funds. More than 30 years after this act close to 80 percent of all403(b) money sits in annuity investments. While participation in annuities is not as great in 457(b)plans it still exists. Is it wise to invest 403(b) or 457(b) money in annuity products?

Annuity BackgroundAn annuity is contract with an insurance company. Two kinds of annuities exist: fixed andvariable. Fixed annuities operate much like a certificate of deposit and come in three basicflavors: traditional fixed, two-tier, and equity-indexed. Variable annuities are simply mutualfunds with an insurance wrapper. There are two phases to an annuity: the accumulationstage and the distribution stage. What the Industry SaysMichael DeGeorge, vice president general council of the National Association for VariableAnnuities (NAVA), said in a March 2004 appearance on CNNfn's Your Money program thatannuities are right only for people "who have maxed out first in 401(k) and other qualifiedplans." The 403(b) and 457(b) are other qualified plans. This sentiment is echoed by Gary Schatsky, president of The Objectiveadvice Group, and aa fee-only NAPFA Registered Financial Advisor. He says the truth is that annuities usuallyonly makes sense outside of retirement plans for a very select group of wealthy investorswho are in a high tax bracket and are in possession of a significant amount of cash theyneed to tie up. Certified financial planner Scott Dauenhauer, president of Meridian Wealth Managementsays: "Variable annuities make very, very little sense. I think some fixed annuities have aplace inside a retirement account. The challenge is finding the right product. That would beone that has a fair rate of interest and a reasonable surrender period or no surrender periodat all." The Knock on Variable Annuities

Exceptionally high fees — up to eight times more expensive than mutual funds

Dubious insurance component — in order take advantage of this "benefit" two thingsmust happen: you must die and the market must have dropped. Even if these twoevents occur you can protect beneficiaries much more affordably by purchasing low-costterm insurance. If you die and the market has not declined you are now dead and havepaid a hefty fee for a "benefit" that is worthless to your survivors. With term insurance ifyou die your heirs benefit whether the market goes up or down.

Surrender charges — often lasting as long as 10 years

Reasons Annuities Are Prevalent in 403(b) Plans

Pushed by commission-based sales force

Lack of employee understanding about workings of the 403(b)

Lack of employer oversight and understanding about workings of the 403(b)

Low-Fee 403(b) and 457(b) ProductsFixed annuities with a fair rate of return and a reasonable surrender charge, and no-loadmutual funds from the likes of Fidelity, T. Rowe Price and Vanguard can be attractivelow-cost options. Loaded mutual funds can be just as expensive as high-fee variableannuity products. The notable exception to high-cost annuities are annuity products fromTIAA-CREF. With fees that are among the lowest in the financial service industry and theabsence of surrender charges, a fixed or variable annuity from TIAA-CREF can be just asaffordable as a low-cost, no-load mutual fund. See: Fees and How They Affect SavingsSee: Retirement Plan FeesSee: 10 Questions to Ask Before Buying a 403(b) Fixed Annuity If You Need AdviceExplore hiring a fee-only Certified Financial Planner Practitioner®. You will pay a flat hourly

Read a rebuttal to thisarticle. Read More

What's Wrong WithVariable Annuities?Smart Money

Beware the EquityIndex AnnuitySan Diego Union

403(b)wise : Wise Moves : Do Annuities Make Sense? http://www.403bwise.com/wisemoves/annuities.html

1 of 2 1/15/2014 10:23 PM

fee and have piece of mind knowing your advisor is not pushing product due to financialincentives. Resource: Protect Your Money: Check Out Brokers and Advisers from the SEC. Annuities in RetirementImmediate annuities or "annuitizing" portions of retirement balances can make a lot ofsense in retirement. This involves trading a sum of money for a steady stream of income. For more information see: Webannuities.com Annuity WarningEquity-indexed annuities are being heavily pushed by the insurance industry as a way toenjoy the growth of the stock market without the risk. Lack of disclosure and complicatedreturn formulas, coupled with extremely high commissions and long surrender periods havecombined to make this "investment" a riddle wrapped in an enigma. Two-tier and bonusannuities are equally suspect. Some agents push the tax-deferred benefits of annuityproducts. The 403(b) and 457(b) are already tax-deferred vehicles. No further tax benefit isachieved by investing 403(b) and 457(b) money in an annuity. Finally, be wary of thosetauting the loan provisions of annuity products. See: The 403(b) Loan: The New DebtorsPrison?

Home | Disclaimer | © 2004 bWise Guys, LLC. All rights reserved.

403(b)wise : Wise Moves : Do Annuities Make Sense? http://www.403bwise.com/wisemoves/annuities.html

2 of 2 1/15/2014 10:23 PM