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Choosing a vendor for your 403(b) plan can be very confusing due to the number of options. Individual accounts in a 403(b) plan can fall into one of the following categories: a variable annuity contract, which is a contract provided through an insurance company and known as a 403(b)1, or a custodial account, which is an account invested in a mutual fund and known as a 403(b)7.
This article examines variable annuity contracts. But right off the bat, you should know that annuities have high surrender fees, high-pressure sales tactics, high expense ratio, Mortality and Expense Fee, and steep commissions for the people who sell them.
A variable annuity is a contract between you and an insurance company in which your contributions are deducted from your paycheck before taxes. A variable annuity has two phases: an accumulation phase and a payout (annuitization) phase. The goal of a variable annuity is to provide a steady stream of income during retirement. (Note: You do not have to take out money as a series of payments. You can just take the money out when you want it, pursuant to IRS regulations.)
Most variable annuity contracts purchased by educators are sold by a sales rep from an insurance company who arrives in the faculty lunchroom to give a presentation. The sales rep may tell you that you don't have to pay anything for their service. But no one works for free.
A variable annuity commission is an amount the sales rep is paid when they sell you a variable annuity. Some receive an upfront commission for selling the variable annuity and a smaller "trailing commission" for each year that you own the account. Trailing commissions are yearly payments to the rep from your variable annuity. Their pay is usually a percent of the amount you deposit, either on a deposit-based or asset-based option.1
Annuities also have a feature called the ‘surrender charge period’. This can run from 5 to 10 years depending on the variable annuity you have. During this time frame, you cannot move your money out of the variable annuity without incurring a penalty. Some vendors charge rolling surrender charges so each new contribution out of your paycheck starts a new surrender time frame.
If you are interested in speaking with John Carbonara to review your present 403(b) plan, you can book an appointment below using his online calendar. This is a complimentary service to educate and increase awareness. We look forward to hearing from you.