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Through no fault of their own, most Long Island teachers have 403(b) plans that are invested in variable annuity contracts. Most school districts allow sales reps from insurance companies to come into faculty lunchrooms to discuss how teachers can supplement their pensions with a 403(b) plan. The problem is these sales reps are not financial advisors but instead salespeople motivated to sell products that earn them the highest commissions regardless of whether it is beneficial to teachers. This part of the arrangement is not often discussed, and unfortunately, a contract is signed and teachers walk away believing they have a great plan to help them in their retirement. But the opposite is true. Let’s look at why.
It is simple: variable annuities have high fees. Unfortunately, most teachers discover this too late resulting in hundreds of thousands of dollars in lost savings.
Since variable annuities have additional fees for added features as opposed to just purchasing mutual funds, every penny spent on these features is a penny taken away from your investment returns.
Variable Annuities typically charge you in 3 ways: 1
1. Administrative Fees: Approximately .26% of your account value or a flat fee of $25-$30 a year
2. Expense Ratio: Approximately .75% of your account value
3. M&E Fees: Approximately 1.20 % of your account value
You don’t see the cost of these 3 expenses because they are often not transparent and are automatically taken right out of your account value.
In our next article, we will discuss in more detail how the M&E (the death benefit fee) of variable annuities can be damaging to your investment.
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.